Finance is an extraordinary effective tool in
spreading economic opportunity and fighting
against poverty. Wider access to finance helps both the producers as well as consumers in raising
their welfare status. Access to finance allows the poor to use their rich talents or opens avenue
for greater opportunities. A composite set of services like credit, savings, and insurance
protects from the unexpected shocks or fluctuations. Therefore, the role of finance has been critical
in economic growth and development as observed in many of the countries over the years. In
one of the early expositions, Schumpeter (1911) argued that the functions and role of finance
are essential for technological innovation and economic development. A number of studies
have found that the poor need financial services to help them, manage their lives and livelihoods
that are complex, diverse, dynamic and vulnerable, and the poor want their financial services
to respond by being reliable, flexible, continuous and convenient (Morduch and Rutherford,
2003). Financial system affects growth by altering the savings rate sometimes by their allocation
of savings for capital producing technologies (Romer, 1986). Credit or other resource
allocation processes of financial institutions can, in principle, lead to efficient financial management
and enhanced growth. Provision of finance facilitates entrepreneurship, innovation, and
improvement of economic productivity and thus finally contributes to both economic development and growth.
In India, in the pre-reform period, the commercial banks were nationalized (in 1969
and 1980) with an objective of extending the financial services to rural areas. For long, these
banks played a vital role in providing financial services to the rural areas. However, the introduction
of financial reforms had an instantaneous, direct and remarkable effect on rural credit system.
The policies of liberalization have generated shocks to financial sector and there has been a
decline in rural banking in general, and in priority sector and preferential lending to the poor in
particular (Ramachandran and Swaminathan, 2002 and 2005). These changes in pre- and
post-economic reforms are explained through indicators such as the number of rural bank offices, the
rural credit outstanding and deposits, Credit-Deposit (C-D) ratio, credit share in favor of
agriculture and small-scale industries, and credit to the priority sectors. |
