79 % of Indian don't have access to credits from a formal source

Monday, 30 January 2006

World Bank economist says more reforms needed for an inclusive financial sector

# Problem of access is more severe for rural poor
# India's financial system stabilised at the cost of efficiency
# Private credit to GDP ratio in India is under 40 per cent
# India's financial sector not very successful in allocating resources

CHENNAI: Large segments of the Indian economy such as small and medium enterprises and rural households are still excluded from the formal financial system and the problem of access is even worse for the rural poor, according to Priya Basu, an economist at the World Bank (WB).

A recent WB study showed that 59 per cent of the rural households [inclusive of the rich and the poor] in India did not have a deposit account and 79 per cent had no access to credit from a formal source.

Around 70 per cent of rural households [only the poor] did not have a bank account and 87 per cent did not have the access to credit from a bank or other formal institutions, she said while releasing her book, `India's Financial Sector: Recent Reforms, Future Challenges,' at a function organised by the Institute for Financial Management and Research here on Monday.

Ms. Basu is a lead specialist, Finance and Private Sector for India, at the World Bank.
Though rating agencies had said that India's financial system stabilised after the economic reforms, this had been at the cost of efficiency.

India's financial sector had not been very successful in allocating resources to finance higher levels of investment needed to sustain growth and alleviate poverty.

The Government's deficit financing had driven banks to divert financial resources to safer Government securities.

This had led to the private sector not receiving credit at expected levels. Private credit to GDP in India was under 40 per cent as against more than 100 per cent ratio of countries such as China, Korea and Malaysia, Ms. Basu said.

A new wave of reforms was needed to create a better functioning and inclusive financial sector. This would require rethinking on how to merge the objectives of the financial sector with profitability. The key words were commercialisation, competition and efficiency, she added.

A panel discussion on salient aspects of the book was also held. Published by Macmillan India Ltd, it is priced at Rs. 350.