NEW DELHI: India should enhance supervision and implementation of financial inclusion policies to avoid financial instability and social discontentment, says a new discussion paper of the International Monetary Fund (IMF).
The authors of the paper titled ‘Financial Inclusion: Can It Meet Multiple Macroeconomic Goals?’ have analysed programmes like Jan-Dhan and raised doubts whether the ultimate objectives could be achieved.
The paper is part of the staff discussion notes (SDNs) that showcase policy-related analysis and research being developed by IMF staff members for wider global debate (not views of IMF).
“The US sub-prime crisis of 2007 and India’s 2010 microfinance crisis show, ‘let them eat credit’ policies can contribute to financial instability and social discontent if supervision and regulation do not keep pace,” states the paper.
Financial instability, in turn, can lower growth and worsen inequality (as evidenced, for example, in the US following the global financial crisis), and thus undo the very objectives that were sought through inclusion, the paper points out. Analysing India’s efforts in financial inclusion, the paper says that recently, the Pradhan Mantri Jan Dhan Yojana, a financial inclusion initiative, was launched with the goal of opening a bank account for every household. By offering incentives such as zero balances, overdraft facilities, and free life insurance, the enrollment figures shot up, with close to 170 million accounts opened by early July 2015.
“The programme has relied heavily on state-owned banks, accounting for 97 per cent of enrollment. It remains to be seen how much of the accounts are actually used,” states the report. It further points out that bank stability weakens as financial buffers (capital and profits in banks) are eroded. The presence of supervision and regulation mitigates this impact.
In this regard, India’s efforts to minimise these trade-offs include better use of relationship-based lending, greater disclosure, and active trading of credit facilities to create the liquidity for priority sector lending.
The paper suggests that a limit on the “stressed” debt-service-to-income ratio for prospective borrowers could guard against overstretching on loan repayments if interest rates and exchange rates were to rise.