It is the failure of our banking system that led to the rural indebtedness, asserted T Vijay Kumar, joint secretary in the rural development ministry, at the two-day microfinance summit in New Delhi that concluded on Tuesday. He said: “I would say failures of the banks led to the poor becoming victims of high cost borrowing - moneylenders and the micro-finance institutions (MFIs)”.

“Why did the banks allow business to go to the money-lender or the MFIs to the detriment of the poor?” he wondered aloud, pointing out that, “people can’t come out of poverty by borrowing at 30 to 40 percent interest”, which is what the moneylenders and MFIs charge.

Kumar said the banks failed to cater to the self-help groups too. He suggested that instead of building capacity of SHG money should be spent in building capacities of the banks to help the poor in rural areas.

The strong words come with a policy tweak.  The rural development ministry is planning to set up a dedicated national bank for women self-help groups (SHGs) so that loans could be provided at the base rate – the rate at which banks lend to MFIs.

Simultaneously, the National Bank for Agriculture and Rural Development (NABARD) also intends to add its bit. “The Andhra Pradesh MFIs crisis has given opportunity to strengthen the bank-SHG linkages. There should be revival of co-operatives in India to strengthen the credit needs for the poor,” S.L.Kumbhare, chief general manager of NABARD told Governance Now on the sidelines of the summit.

The NABARD also intends to launch what it calls SHG II, a bank-SHG linkage programme, with several new features which would include promoting savings among the members and community managed banking in which the community will decide how the money would be spent.

India has the second-highest number of households in the world with no access to formal finance, according to a report released by the Assocham, a business body, in July this year. There are about 600,000 villages but only 38 percent of branches operate in rural areas. The report also said that only about 40 percent of India’s population had bank accounts.