Promoting Financial Inclusion: Can the Constraints of Political Economy be Overcome?

This paper explores the status of recommendations made by Rangarajan Committee on Financial Inclusion and Raghuram Rajan Committee on Financial Sector Reforms. It examines why financial inclusion efforts have met with limited success despite being given priority by the Government of India (GoI), and other policymaking and regulating institutions in the country.

Regulations for strengthening financial inclusion in India have not yet had a substantial impact on outreach to excluded populations. Reasons for this include:

• Institutions responsible for providing financial services do not yet perceive the financial inclusion business as sustainable;
• Overemphasis on prudential aspects by regulators has constrained regulatory and promotional measures for financial inclusion;
• Financial inclusion faces challenges such as social exclusion of low income families, high operational costs, lack of incentives, and governance issues;
• Financial regulators and GoI have opted for prudence in relation to financial inclusion rather than bold experimentation.

The paper concludes that the price of prudence in the regulation and promotion of financial services for low income families is higher than the cost likely to be incurred on regulation and supervision of a more dynamic system of inclusion that uses a bolder, more experimental approach.