The future growth of the domestic economy, to a large extent, will depend on the robust performance of the agricultural and rural sector for the fact that they constitute huge consumer base and decide the growth in demand in other sectors. The manufacturing and service sectors cannot sustain the economy’s growth if the rural sector under performs.

The contribution of the banking and financial sector to the current economic growth of the Indian economy is very significant.  However, the access of formal banking services is still wanting to a large section of the rural, and agriculture sector and the common man in general. Delivering small-scale loans  and savings mechanisms can be particularly challenging in areas of low population density, where the distance between clients is great, transportation networks are often poor, establishing a brick and mortar branch of bank has become prohibitively costlier and low income levels tend to translate into impracticably small financial transactions leading to unprofitability of the proposition.

Given that most rural people depend at least in part on agriculture for their livelihoods, these conditions make the prospect of operating a self-sustaining, rural microfinance institution (rural MFI) even more daunting. Agricultural finance is notoriously risky. Many farmers need credit to purchase seeds and other inputs, as well as to harvest, process, market and transport their crops. While borrowing on the basis of anticipated crop production might seem logical where collateral assets are few, such loans expose the lender to production and price risk. Natural disaster, a decline in market prices, unexpectedly low yields, the lack of a buyer, or loss due to poor storage conditions are only some of the factors that can result in lower than expected revenues.

Such a fall in revenues can often lead to high default rates on agricultural loans. The overwhelming failure of state development banks that provided thousand of crores of rupees in subsidized agricultural finance to farmers in the 1970s and 1980s, combined with still inadequate rural penetration by risk-averse commercial financial institutions, has led to a widespread dearth of agricultural credit giving large scope for unscrupulous private money lenders. Yet, new approaches are increasingly being developed to fill this gap in a sustainable and efficient manner. This has resulted in emergence of micro finance institutions in the agricultural financial space to fill the gap.