Feasibility of private rural financial institutions

Abstract

Abstract At present rural credit market is dominated by private money lenders who charge exorbitant interest rates and the public bankers who are unable to cater to most of the credit needs of the villagers and in case of those needs they cater to the transaction costs to the borrower are abnormally high and thus increasing the effective rate of interest. This study tries to test the feasibility of a Private Rural Financial Institution(PRFI) which is expected to cater to almost every need of the villagers at competitive interest rates and minimum transaction cost. The objectives of the PRFI being (1) to undertake rural lending as a financially viable activity (2) to make the rural credit market more competitive and thus contribute to the development of rural economy. In the course of the project, we came up with an unanticipated lack of data finding an immense replication of research efforts on a few subjects only most of which were irrelevant to the study. Consequently, we were unable to really analyze the feasibility of such a PRFI and the focus of the study shifted therefore to the development of methodology for such analysis. With whatever date were available to us and making some simplifying assumptions we reached to the conclusion that the PRFT is viable if it could raise funds at a weighed Average Cost of Capital (WACC) less than 30.7 % Given the present capital market in India we thought that the WACC could be around 20% and therefore one may conclude that the PRFI is feasible.