Credit Reforms need of the hour: Haseeb Drabu

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{image-inflation+rbi_11062008.jpg}Mumbai, Jun 11: Hitting hard of Reserve Bank of India's move in carrying out structural reforms in the financial sector without a fresh look into restructuring credit market, noted economist and J&K Bank Chairman and CEO Haseeb A Drabu today said it is like carrying out reforms in the agricultural sector without land reforms.

Speaking at the Plenary session of the fifth Skoch Summit, Dr Drabu said, ''The moment credit markets are restructured as part of the overall agenda of financial sector reforms, financial inclusion will get underway in a self sustaining manner and not seen as a corporate social responsibility.'' He said financial sector reforms initiated in the early 1990s had attempted to enhance allocative efficiency and not distributive gains. As such RBI made reformist changes in the structure and development of financial markets, especially the money, government securities and forex markets in view of their critical role in the transmission mechanism of monetary policy. ''Reforms of the credit market was conspicuous by its absence'' he added.

He said though RBI had been pushing financial inclusion, it had never been an intrinsic part of the financial reforms, which were aimed at creating an efficient, competitive and stable financial sector. ''Interventions must be backed not only by a institutional but also a policy framework that supports and compliments the effort to deliver the end product of financial inclusion,'' he added stating that Financial Inclusion now being boosted in a big way was nothing new to the country.

Dr Drabu said: ''We have been going round in circles with regard to the issue of 'inclusion'. Be it growth with redistribution or redistribution with growth or priority sector lending or micro financing, we have been addressing the same issue since the mid-seventies in different forms and varied guises, without much success.''

Dr Drabu referring to the new mantra of micro financing emerging after the Bangladesh-based Grameen Bank success said that little recognition was given to the fact that Grameen story was a social process rather than a structure of credit matter. It succeeded because of a particular social context and its replicability count not be guaranteed in all the societies.

''It was not seen so much as a commercial success story as it was as a socially desirable or indeed obligatory movement'' he added.

Referring to the current advocacy of the RBI on financial inclusion said not only financial inclusion was essential because of its implications for the welfare of citizens, but it needed to be stressed that it has to be an explicit strategy or fostering faster economic growth in a more inclusive fashion.

He said, two changes have determined the changing understanding of growth process. First was the greater financial intermediation or deepening of the country's economy and the second was the advent of technology. While deepening of economy drove demand, the second had driven distribution he said and commented about the declining role of public investment in general and its role as an instrument of redistribution or equalisation in particular.

He said it was a paradox that the growth process that had been unleashed was mariginalising people across sectors and spaces. It was impossible for any comparative static interventions to negate or compensate these effects of a dynamic process. ''Exclusions caused yesterday by the growth process are sought to be addressed today by interventions. It is a reactive framework rather than a probative one'' he added.

He said that institutions that have been given the job of executing these interventions, public or private, were not only unequipped to do so but also operate in a policy framework that did not support their doing so. Opening up of a no frill account for everyone was an area or a state makes up for financial inclusion.

''It is pretty much like being definite literate if you can sign your name or read the address on a letter,'' Dr Drabu said.

In today's macro monetary environment banks out to be bending backwards to get low cost deposits from retail segment in the interest of better liability management. But the availability of alternative more attractive instruments in urban areas and higher transaction costs in rural areas impair their effort. Hence interventions must be backed not only by a institutional but also a policy framework that supported and complimented the efforts to deliver the product of financial inclusion, he added.


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