Rajan says need for balance between the poor and profits

HYDERABAD/MUMBAI: India needs to ensure financial institutions have enough incentives to keep lending to the poor, RBI governor Raghuram Rajan said at a seminar

HYDERABAD/MUMBAI: India needs to ensure financial institutions have enough incentives to keep lending to the poor, RBI governor Raghuram Rajan said at a seminar on financial inclusion in Hyderabad on Monday, according to a copy of a speech released by the Reserve Bank of India (RBI).

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The central bank would continue to look at the rules as it seeks to find a careful balance between the needs of the poor and the push for profits by financial institutions, he added.

Moreover, financial services institutions might also want to move away from credit and focus on savings instruments while pushing for financial inclusion, he pointed out.

For example, many successful institutions, which work with the poorest of the poor, have tried to get them to set aside some money as savings, before giving them loans.

“Not only does the savings habit, once inculcated, allow the customer to handle the burden of repayment better, it may also lead to better credit allocation.”

The central bank may look at easing rules that at present prohibit taking collateral for loans below a certain size for some population segments, and reducing the ceiling rates for loans provided by micro-finance firms.

“I am confident that in the foreseeable future we will bring formal financial services to every Indian who wants them… Financial inclusion will be an important element in ensuring access and equity, necessary building blocks for the sustainable growth of our country,” Rajan said.

To make formal savings more attractive, easy payments and inclusion of the postal payment bank and telecom affiliated payments banks, which will become operational soon, will be helpful, he said.

Rajan also explained economic impediments to greater financial inclusion through the acronym IIT — information, incentives, and transaction costs — The banker, especially if he is not from that region, will have difficulty in getting sufficient information to offer financial products; the lender may also not have incentives to lend to the excluded as the legal system does not enforce repayment quickly or cheaply; and since sizes of transactions are small, fixed costs are relatively high.

Meanwhile, speaking on another issue, Rajan said India has a long way to catch up with China on per capita GDP, and will need years of strong growth. He, however, cautioned against expanding economy at the cost of environmental sustainability.

(With inputs from PTI, Reuters and Mint)