Nitin Rao

Roadblocks to Financial Inclusion

When I recently attended The Second Annual Conference on Public Policy and Management at the Indian Institute of Management, Bangalore, I had not imagined that it will be difficult to summarize it in a blog post. Discussed at the conference – current thinking on the proposed National Rural Employment Guarantee Bill, papers on increasing financial inclusion and other issues on policy in practice.

I particularly liked a key note address by Usha Thorat, Deputy Governor – Reserve Bank of India. She spoke of different methods in which financial inclusion could be promoted – providing easier, affordable access to financial services. These include encouraging GCCs (generalized credit cards) for rural customers and recognizing microfinance institutions.Even with all the euphoria about financial inclusion, it is critical that political leaders do not jeopardize this process. Unfortunately, there have been cases of governments earning favour through loan waiver schemes. There are examples of this in states such as Punjab and Karnataka. This has become less frequent over the last few years–but remains an issue. With the government controlling over 80% of banks, this is not difficult.

As Mrs. Thorat put it, every loan waiver such scheme is creating a moral hazard – and pushing back the whole process of moving towards financial inclusion by a decade. It removes the very incentive of maintaining a good credit record. A professor at the conference shared with us that he had met farmers who were strategically not repaying their loans.

Which brings us to the question – What good can emerge from credit rating and risk pricing, unless one establishes the value of maintaining a good record?

Governments on the other hand find themselves in a difficult position. They do not want to be seen as being indifferent to the widespread economic disempowerment of the very poor. And cannot afford to destroy the financial system.

Instead of pressurizing banks to lend banks at sub market rates or give one time settlements, governments might do better to create an environment where a good credit record is valued.