India’s Rural Financial System: Does it Support Pro-Poor Innovation?

Lina Sonne

#2010-039

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

  


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