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Report summarily dismisses financial inclusion - Outside View by S.S. TARAPORE
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Report summarily dismisses financial inclusion
Apr 22, 2013

The Financial Sector Legislative Reforms Commission (FSLRC) submitted its report in March 2013. The expanse of the report and its breath-taking panoramic vision of the brave new world are indeed awesome. For a meaningful assessment of this report, it is necessary to focus attention on each of the major recommendations. This article focuses attention on the Commission's recommendations on financial inclusion and market development.

Recent Initiatives on Financial inclusion

In recent years, there have been a number of initiatives by the government, the Reserve Bank of India (RBI) and participants in the financial system to reach out to segments of the population which have hitherto been bypassed by the financial system. It is unfortunate that 44 years after the nationalization of banks, large tracts of the population depend on the unorganized sector for funds and borrow at astronomical interest rates, as high as 50-60 per cent per annum.

It is recognized that as part of the endeavor to mainstream the marginalized, it is essential to bring the hitherto neglected segments of the population into the financial system. The problem is daunting as, in a sense, the marginalized are the mainstream.

It is well understood that financial inclusion cannot be undertaken in isolation and a basic precondition for successful financial inclusion is the generation of some real sector activity. Not all the initiatives of the recent period have been successful. Bringing millions of persons into the financial system is a stupendous task and various novel schemes, including the use of technology, have been considered to bring about meaningful financial inclusion. There has been extensive debate in India on how to go about optimal financial inclusion and out of this healthy debate, it is hoped that there would be some progress towards the desired objectives.

Approach to Financial Inclusion

The commissioners are eminent persons with rich experience in the financial sector and one could have legitimately expected the commission to provide thought leadership on how to traverse to successful financial inclusion. It is rather unfortunate that in its magnificent tome, financial inclusion gets a perfunctory attention. Financial inclusion has gone through many different avatars over the past hundred years and at the present time, this is a central issue in the financial sector. Again, the issue of financial inclusion has been addressed in extensio in both industrial, as well as emerging market economics. In this context, the cavalier treatment of financial inclusion in the FSLRC Report is inexplicable.

Commission's Wisdom on Financial Inclusion

According to the Commission, development concerns within the Indian financial market involve two aspects; (i) financial inclusion initiatives, where certain sectors, incomes or occupational categories are beneficiaries of redistribution of financial services and (ii) market development, fostering the emergence of market structure and processes. The Commission claims that financial inclusion comprises certain interventions that impose costs on society and yield gains to particular groups of citizens. An illustration of this, according to the Commission, is that banks are required to open branches in rural areas. The Commission is of the view that the central government should reimburse the service providers via cash or cash equivalent or tax benefits.

On the issue of fostering market development, the Commission recommends that "A high-quality rule-making process should involve features such as cost-benefit analysis and notice-and-comments periods" (Page 101 of the Report).

Critique of Commission's Recommendations

The committee's analysis and recommendations on financial inclusion are perfunctory and totally alien to the current debate. The Commission is all too eager to compensate the providers of financial services when they are being provided to the deprived segments, but is not concerned about the current obsession with providing cheap credit to large industry at the cost of small depositors. The Commission shows no sensitivity to the well established principle of distributive justice. In common parlance, the Commission's stance is tantamount to nonsense on stilts. It bears mentioning that the government has underwritten huge losses by banks, both in the public and private sectors, even though a sizeable part of the losses emanate from large industry and other large borrowers.

It is not as if the government is not pulling its weight in the remote areas of the country. The government has been picking up the tab for provision of the economic and social infrastructure in the undeveloped regions of the country. The financial sector also has to play its role and needs to understand that financial inclusion is not only about costs incurred by the financial service providers, but that it is a profitable proposition for providers of financial services. Illustratively, the savings bank account holders in the rural areas provide banks with low cost stable deposits.

In the area of financial inclusion, the Commission comes out like an industry association pleading for concessions, rather than a high-powered, once-in-a-lifetime National Commission, to bring about improvements in India's financial sector.

Commission's Wrong Landing

The Commission's perfunctory handling of financial inclusion is a major lacuna in the Report. It is as though the Commission's spaceship headed for Mars has erroneously landed on Planet Earth. Its handling of financial inclusion is totally incomprehensible and borders on dereliction of duty. It is incumbent on the part of Commission members to recant and say mea culpa (my fault).

Please Note: This article was first published in The Free Press Journal on April 22, 2013. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


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