Rural Financial Services through State Banks

Are state banks a better vehicle for expanding financial services to rural poor?
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State banks offer huge potential for sustainable expansion of a diverse range of financial services to low-income populations. This note explores ways to build on their infrastructure, services, and systems to extend a range of viable, demand-driven, and low-cost financial services to rural populations. The note also explores Policy and implementation issues.

The paper suggests three main options for engaging with such banks:

  • A management-led turnaround of the bank;
  • The creation of a specialized unit that utilizes bank branches and systems;
  • Linkages with other financial service providers.

Further, it relates the lessons learnt in working with state banks, which include:

  • The government, board, and management of the state bank to must be committed to introducing micro- and rural-finance good practices, and must agree to refrain from political influencing bank decisions;
  • There must be sufficient demand for new financial services to sustain rural service points;
  • Patience and commitment to long-term engagement is required from donors as well as from the state bank and government.

Finally, the paper recommends:

  • Considering working only with state banks if there is sufficient long-term protection from government influence;
  • To be prepared for technical assistance and systems investment;
  • To proceed ambitiously but cautiously;
  • To support development and introduction of new financial products.

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