One of India’s strengths has been the ability of its governance institutions to survive the vagaries of the political process. Whoever wins the next election, Raghuram Rajan will still be Governor of the Reserve Bank of India. His task may be made easier or harder by the new government, but he will remain in a position to shape some crucial aspects of India’s economic future. Recently, he gave a speech on financial inclusion, drawing on the Nachiket Mor Committee report, where he outlined some fresh thinking. Financial inclusion is important for increasing financial savings and for improving the quality of financial intermediation.
Financial inclusion encompasses broadening access to financial services, deepening and improving the quality of services to those who have access, and increasing financial literacy and consumer protection. As is well known, there are informal sources of financial intermediation, but these can be costly and inefficient. One of Governor Rajan’s main themes was that information technology can reduce the costs of financial services, allowing inefficient providers to be replaced, and increasing access in this manner.
Some costs are technological, and here information technology plays an obvious and direct role, allowing cumbersome paper-based and manual methods to be replaced by automated electronic mechanisms. But information technology also has a powerful indirect role to play by allowing the creation of reputations in the market for credit. Currently, such reputation mechanisms for creditworthiness are sorely underdeveloped in India. The problem is not just cost or technology. The transactions that would allow such reputation building to occur do not take place, or are hidden from view in informal markets.
What is required is a systemic approach to reform, and RBI has a major role to play in this process. Till recently, RBI has tended to put safety and stability ahead of financial development, but technology has made that a false tradeoff, and there is considerable catching up to be done. Governor Rajan highlighted several areas for progress. One is having more reasonable “know your customer” rules, to allow more initial entry into the formal financial system. Another is agreement and collaboration among a range of financial institutions (especially banks, but possibly new, specialised institutions) and telecom operators for mobile-based financial transfers. RBI can play an important role in helping disparate institutions jointly develop the needed infrastructure, not least by providing regulatory clarity.
Financial inclusion is often taken to refer to services for households, but perhaps the most