The past two and a half decades have been action packed as far as the rural finance scenario is concerned. There have been several innovations; some of the ideas that were thought about in the 1980s have become so intrinsic to the financial system that they no longer look like innovations. As the National Bank for Agriculture and Rural Development (NABARD) celebrates its silver jubilee, it is worth looking at the milestone events that have happened in this field. This is neither an evaluation nor an endorsement of the role of NABARD, and in some of these initiatives, NABARD has had no role whatsoever.

One of the most significant innovations—and now it has been so much embraced by the banking sector and the state that it no longer looks like an innovation—has been the concept of Self-Help Groups (SHGs). Strictly speaking, even SHGs were not as much an innovation as they were an improvization of the informal systems that existed in the society. But, nevertheless, an SHG has to be treated as an innovation from the point of view of the formal financial sector because for the first time something like a group social collateral was accepted by the banking system as a surrogate for the traditional collaterals that they were used to. The reason why I call SHGs an improvization rather than an innovation is because they run on the basic principle of a chit fund or a bishi.

The most important piece in all this was that SHGs did not ignore the markets in two most significant ways. They set interest rates on loans near the informal lending rates of their areas (in most places at around 24% per annum), reducing the possibility of arbitrage. Second, they soon linked with the banks and brought the mainstream market players into the operations. Thus, the SHG movement in India, which is uniquely Indian, went much beyond bishis and can truly be called the innovation that emerged from the grassroots and later replicated elsewhere.

Innovations in Rural Finance : The Road Ahead, Andhra Pradesh, state provides, interesting case study, most diverse, microfinance models, competing, sometimes unhealthily, poor, action packed, rural finance scenario, concerned, several innovations, intrinsic, financial system, longer look, NABARD, informal systems, formal financial sector, traditional collaterals