Basic suite of products by banks, key to financial inclusion: Rajan

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Simplicity and reliability in financial inclusion in India and direct benefits, though not a ‘cure-all’, can be a way of liberating the poor from dependence on indifferently delivered public services and from venal politicians, Reserve Bank of India Governor Raghuram Rajan said here on Monday.

Dr. Rajan was delivering the twentieth Lalit Doshi Memorial lecture on Monday titled ‘Finance and opportunity in India’.

Financial inclusion was about getting five things: right-product, place, price, protection and profit.

Dr. Rajan said it would be useful to monitor the usage of cash transfers where automation was possible.

“If there is evidence that cash transfers are being misspent, some portion of it could be given in the form of electronic coupons that can be spent by the recipient only on food, education or healthcare,’’ he said.

In order to draw in the poor, he said, the products should address their needs — a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the moneylender, easy-to-understand accident, life and health insurance and an avenue to engage in saving for the old age.

“The RBI is going to nudge banks to offer a basic suite of products to address financial needs.’’

The RBI Governor said that de-monetisation was often cited as a solution to get black money out of the system, “but the clever find ways around it.’’

He said a lot of incentives were around taxes and India’s maximum tax rate of 33 per cent was lower than many industrial countries. “So I would focus more on tracking data to find where tax is not being paid.”

He also clarified that he had not predicted another crisis as had been reported in a section of the media. He said that as part of a long interview, he had felt that monetary authorities in several developed countries were doing ‘too much’.

“Because of the political paralysis in several countries, they are relying on monetary authorities to provide whatever boost there could be to the economy. I thought this was dangerous because the monetary authorities are boosting asset prices rather than real activity.’’

Peaking asset prices will create volatility

If asset prices peaked out in a sharp way, that would create immense volatility. The increase in asset prices in the recent recovery has been the fastest on record. “This has not been accompanied by increase in real activity and that is the disconnect that we should be worried about when the time comes for interest rates to go up.’’

“Central bankers are trying too hard, and I would prefer monetary policy to do less and other parts of the economy including the political system to do more.’’

He said that when interest rates started picking up in industrial countries, India would be tested by capital outflows.

“My hope is that we have done enough in terms of strengthening the macro-economic fundamentals of the country and in trying to move capital flows to the safer end and building reserves that that volatility will not affect us anywhere near the extent to which it affected us last year.”

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