Education

Blend monetary policy with prudential regulation

D. MURALI | Updated on August 03, 2011

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The campaign for financial inclusion must gather force, but care must be taken not to create a sub-prime culture, cautions Rakesh Mohan in ‘ Growth with Financial Stability: Central banking in an emerging market' ( www.oup.com). Noting that much of the informal borrowing by the poor is for purposes that should really be served through public services, he advises that better provision of health and education services is the solution, not extension of formal credit leading to excessive indebtedness.

An interesting point highlighted in the book is that at current per capita income levels in India, access to formal financial services is actually much above what might be expected from international experience, especially in the matter of access to savings facilities.

Key constraint

Adding that credit extension can, however, be improved significantly for the less well-off and smaller enterprises, the author underlines that a key constraint in credit appraisal has been the lack of readily available credit information for small borrowers. It can be reassuring, though, to learn that new technological developments enable much greater financial inclusion without sacrificing the prudential quality of the financial service providers.

Monetary policy

Apart from mentioning other challenges to the Indian financial sector – such as humongous infrastructure financing and volatile international conditions – the book is noteworthy for bringing attention to the difficulties faced by monetary policy in the face of high economic and financial growth.

Observes Mohan that there are few available models to guide monetary policy in such a context where the growth of monetary aggregates has to be high on a sustained basis but tempered by the need for preserving price stability.

Advice to RBI

His counsel, therefore, to the RBI is that it must continue its practice of consistent and harmonious blending of monetary policy along with prudential regulation; that is, continuing its dual functions as a monetary authority and a financial regulator. Valuable addition to your ‘finance' shelf for the insightful big picture that the book offers.

Published on August 03, 2011

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