" Jan Dhan Yojana -- beyond Fault Lines "
Time and again, RBI Governor Raghuram Rajan has been making scathing attacks on the Financial Inclusion in the land of poor. It was not long ago that we were called the land of snake charmers, but to change that image overnight would just be pushing ourselves beyound the "Fault Lines", a book aptly authored by the Governor himself.
Speaking at an IMF event in Lima on October 8, Rajan talked about how, beyond a point, financial inclusion, especially one led by a drive to make easy credit available for the poor and hitherto unbanked, can actually have a negative impact on the financial stability of the whole system.
It is important to note that Rajan was the man who had predicted the Sub - prime crisis years before it actually took the financial giants like Lehman Brothers down while the unfallible Bank of America, Bear Stearns and Merrill Lynch were sold at fire-sale price and Goldman Sachs and Morgan Stanley became commercial banks. This eventually lead to a full blown global financial crisis in 2008.
Rajan's word of caution comes at a time when India is seeing a massive campaign for financial inclusion in the form of the Jan Dhan Yojana, under which over 18.5 crore new bank accounts have been opened in the past one year. Each of these accounts comes with an overdraft facility of Rs 5,000 once the account remains active for six months.
Although not speaking specifically about India, Rajan said ìÖmy sense is that, beyond a certain point, push becomes actually negative because you bring in people who arenít able to absorb credit.î The flip side of pushing financial inclusion is the supervisory capacity of the banks and lending institutions. There is evidence already that because of relaxed KYC norms, there is considerable duplication in the newly opened bank accounts.
Although Financial inclusion is an effective tool for raising economic growth and reducing inequality, but due consideration must also be given to the fact as to how too much push can hurt financial stability. The crisis in Indiaís microfinance sector around 2010 was a direct result of lax supervision and excessive lending to people who had no ability to invest the loans productively and repay.
The political economy of the credit-led financial inclusion makes it imperative for the policymakers to use cheap credit as a way to enhance the short-term consumption of voters, while ignoring investment in the real economy. In nutshell, it can be easily implied that such superficial efforts towards financial inclusion will not work in the long term unless there is adequate investment in the core sectors of the economy.
