Financial inclusion and direct benefits transfer can be a way of liberating the poor from dependency on indifferently delivered public services, and thus indirectly from the venal but effective politician, according to Reserve Bank of India Governor Raghuram Rajan.

It is not a cure-all but will help the poor out of poverty and towards true political independence, he said at the Twentieth Lalit Doshi Memorial Lecture.

“But financial inclusion can do more; by liberating the poor and the marginalised from the clutches of the moneylender, by providing credit and advice to the entrepreneurial amongst the poor, and by giving household the ability to save and insure against accidents, it can set them on the road to economic independence, thus strengthening the political freedom that good public services will bring.

“This is why financial inclusion is so important,” said the RBI chief.

He observed that it will be useful to monitor usage (of cash transfers) carefully where automation is possible, and automatically attach further benefits to responsible usage.

The Governor said one concern with cash transfers is whether it will become addictive – whether they become millstones keeping the poor in poverty rather than stepping stones out of it. This is an important concern.

Cash transfers work best when they build capabilities through education and healthcare, thus expanding opportunity, rather than when they are used solely for inessential consumption. The vast majority amongst the poor will seize opportunities, especially for their children, with both hands.

“Nevertheless, if there is evidence that cash transfers are being misspent – and we should let data rather than pre-conceived notions drive policy - some portion could be given in the form of electronic coupons that can be spent by the specified recipient only on food, education or healthcare,” the Governor said.

Financial inclusion, according to the RBI, is about getting five things right: Product, Place, Price, Protection, and Profit.

“If we are to draw in the poor, we need products that address their needs; a safe place to save, a reliable way to send and receive money, a quick way to borrow in times of need or to escape the clutches of the moneylender, easy-to-understand accident, life and health insurance, and an avenue to engage in saving for old age.

“Simplicity and reliability are key – what one thinks one is paying for is what one should get, without hidden clauses or opt-outs to trip one up. The RBI is going to nudge banks to offer a basic suite of Products to address financial needs,” said Rajan.

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