2024, Vol. 7, Issue 1

author(s)
Anirban Hazra and Neelanjan Mitra

abstract
India's financial ecosystem is a dynamic mix of formal and informal systems, catering to the diverse financial needs of its population. This research paper analyzes the characteristics, implications, and policy perspectives of India's informal financial system. The study explores the unique characteristics of the informal financial system, including moneylenders, chit funds, self-help groups, and community-based savings and credit associations. It investigates how these entities operate on trust and social relationships, providing accessible and flexible financial services. By examining the implications of the informal financial system, the study highlights its role in supporting entrepreneurship, small-scale industries, employment generation, and poverty alleviation. It assesses its complementarity with formal institutions and its impact on inclusive economic growth. The paper also discusses policy initiatives aimed at striking a balance between the formal and informal financial systems. It examines the Pradhan Mantri Jan Dhan Yojana, an initiative of financial inclusion, and the introduction of regulatory frameworks to enhance consumer protection and stability. The findings provide valuable guidance for policymakers, financial institutions, and stakeholders in integrating the formal and informal financial systems. The paper emphasizes the importance of financial inclusion, consumer protection, and sustainable economic growth. In conclusion, understanding and leveraging the potential of India's informal financial system is essential for inclusive economic development. The research paper offers insights into the system's characteristics, implications, and policy perspectives, guiding the design of strategies to harness its strengths while mitigating risks. Collaboration among policymakers, financial institutions, and stakeholders can pave the way for an integrated financial ecosystem that ensures equitable access to financial services and uplifts lives across India.