India’s Rural Financial System: Does it Support Pro-Poor Innovation?
From the perspective of poverty alleviation, socially relevant, or
pro-poor, rural innovation is of particular interest in a country like
India since it is in rural areas that most of the poor live. Pro-poor
innovation in rural areas is more likely to occur through small-scale
ventures and entrepreneurs than industrial research and development. The
Indian banking system does not efficiently support such rural pro-poor
entrepreneur-based innovation. Instead a pioneering alternative
financing sector has been emerging recently. There are three broad
categories of organisations in this sector: grassroots innovators and
incubators, micro venture capital firms, and small-scale financiers
beyond microfinance. This paper considers why the core of India’s
financial system, its banking sector, does not support rural
entrepreneur-based innovation. It ends by discussing the emerging
alternative financing sector at the periphery which on the other hand
appears able to do so.
Keywords: Pro-poor finance, finance innovation, finance entrepreneurship, financial innovation, rural finance, India, India’s financial system.
JEL Codes: G21, O16, O31, R51
UNU-MERIT Working Papers ISSN 1871-9872