Financial inclusion will curb corruption: Rajan

Talks tough against “crony capitalism”, saying it kills transparency and competition and hence is harmful to free enterprise, opportunity and growth

Mumbai : Reserve Bank of India Governor Raghuram Rajan said the financial inclusion drive, likely to be announced by Prime Minister Narendra Modi on August 15, will break the link between poor public services, patronage and corruption.

“It can break a link between poor public service, patronage, and corruption that is growing more worrisome,” Rajan said, delivering 20th Lalit Doshi memorial lecture here.

The drive is likely to include identifying the poor, creation of unique biometric identifiers, opening bank accounts linked to these identifiers and eventually transferring government subsidies to these accounts. “When fully rolled out, I believe it will give the poor the choice and respect as well as the services they had to beg for in the past,” Rajan said, adding that financial inclusion will be an important part of government’s and Reserve Bank’s plans for the coming years.       Rajan laid extra stress on the cash benefit transfers, saying “money liberates and empowers”.

He also said profitability for banks is very crucial for the success of the scheme, and mentioned ideas like government paying the bank commission for transfers.

The academic-turned-central banker also noted that “crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians” was a major issue in the recent elections.

 He further said that one of the greatest dangers to growth of developing economies like India is the middle income trap where crony capitalism “creates oligarchies that slow down the growth.” The only way of avoiding this trap is to strengthen public services, especially those for the poor, he said, adding that financial inclusion drive of the government and RBI is a a key initiative in the same direction.

To prevent the hazard of people squandering the money on alcohol, etc, Rajan said the money could be transferred to the women of the family, who are generally better spenders.            Other aspects such as linking the transfers to conditions like children attending the school regularly too can be looked at, he said.

Acknowledging that a corrupt monitor will vitiate the entire effort, Rajan advocated that we should still go ahead with the efforts and look for automation on monitoring wherever possible.

Still, if data on misspending emerges, we can look at alternatives such as giving some of the benefit in the form of electronic coupons which can be used by specified individual for a narrow purpose like food, education or health-care, Rajan said.

In the financial inclusion drive, RBI will play the role of enabler and undertake efforts like “to nudge” banks to offer all the basic products to address financial needs.

 Rajan also said the central bank is looking at re-examining KYC norms, to simplify them. He also stated that RBI’s efforts to open the payment banks and small local banks are directed at deepening the financial inclusion itself. He said inclusion of new and inexperienced bank account holders will require protection, and hence RBI is beefing up ‘consumer protection code’ which will emphasise the need for simple and easy to understand banking products.

Rajan also said that people tolerate crony capitalism and vote for “a venal politician” who perpetuates it because the politician “is the crutch that helps the poor and underprivileged navigate a system that gives them so little access”.

To prevent the hazard of people  squandering the money on alcohol,  etc, Rajan said the money could be transferred to the women of the family, who are generally better spenders

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