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An Informal Journey through Self-Help Groups*
* Keynote paper.
1. Economy, Finance and Financial Institutions
Finance is one of the most crucial inputs for economic activity, growth and development. If finance through own accumulated resource or equity is neither available, nor sufficient, debt assumes a major significance. Financial institutions (FIs) play an important role in this regard by channellising funds from surplus sector (savers) to deficit sectors (investors). However, these institutions do not show much enthusiasm to put their resources in rural and backward areas for the benefit of poorer people as these are commercial organisations and are basically interested in profitability and sustainability, for two reasons: (i) incentive for functioning, and (ii) for safeguarding the interest of stakeholders. Besides, the transaction in credit market is different from the transaction in goods market (Llanto, 1990). Unlike in the latter where transaction ends with the sale of goods and receipt of payment, which are more or less instantaneous, in the former what is important is the future endowment of the borrower which depends upon the purpose of the loan, viability of the project and creditworthiness and the strategic skill of the borrower. As these rural backward areas lack infrastructure, entrepreneurship, opportunities, and people are victims of exploitation and ignorance, the transaction cost of investment by the financial institutions and credit risk are high, and return on capital by the borrowing investors is not attractive.
Besides, rural economic agents find the formal urban institutions alien and inaccessible; the attributes, characteristics and personal circumstances of the rural agents are not very much acceptable to the Formal Financial Institutions (FFIs). For both an information gap exists. This accentuates the problem for the FFIs to locate both a good borrower and a good project. Borrowers know themselves better than the FFIs, but do not desire to fully disclose all relevant personal and project information (Leland and Pyle, 1977). The information transfer is hampered by serious moral hazard and incentive problems (Llanto, 1990). Verification of true credentials by an outside lender may prove to be costly if not impossible (Leland and Pyle, 1977). When market imperfections persist, lenders face the problem of managing the risk of loan default (Von Pischke, 1992), and raising the interest rate does not resolve...