Tightening regulations could hamper financial inclusion: RBI Governor

Dr. D Subbarao

Such regulations will increase the banks’ funding costs which will translate into higher lending rates — Dr. D. Subba Rao

Microfinance Focus, Oct. 7, 2009: RBI Governor Dr. D. Subbarao has said further tightening of the financial regulatory regime in India could hamper financial inclusion.

Speaking at a global seminar in Istanbul, organized on the occasion of the IMF-World Bank Annual Meetings 2009 on Monday, he said, “Given the enormity of the (financial) crisis, financial sector regulation is being tightened under the aegis of international bodies such as the BCBS (Basel Committee on Banking Supervision) and FSB (Financial Stability Board).”

Some of the measure on agenda are raising the reserve requirement of banks, framing new regulations for liquidity requirements of banks and requiring banks to hold government securities. “Many of these measures are necessary. But we need to recognize that all such proposals will have the impact of increasing the banks’ funding costs which will translate into higher lending rates,” he noted.

Further elaborating on possible impact on banks in terms of higher costs, erosion of banks’ social responsibility towards the poorer and other needy segments of society, he pointed out that in economies such as India, a large part of population remains financially excluded. “We will need to ensure that efforts at financial inclusion do not get negated by the ongoing tightening of the regulatory regime.”

To overcome this challenge and determine how much to tighten and when, is more a question of good judgment rather than analytical skill, he pointed out. “This judgment skill is the one that central banks, especially in developing countries such as India, need to hone as they simultaneously pursue the objectives of growth and financial stability,” he added.

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