Mixed outcome from priority sector lending system
BANGALORE: Financial literacy is a prerequisite for effective financial inclusion, which will ensure that financial services “reach the unreached and under-reached sections of the society,” Union Finance Minister Pranab Mukherjee said here on Monday.
Delivering the inaugural address at an international workshop on ‘Delivering financial literacy: challenges, strategies and instruments,' organised jointly by the Reserve Bank of India and the Organisation for Economic Cooperation and Development (OECD), Mr. Mukherjee observed that the “outcome from the elaborate system of priority sector lending in India has been mixed.”
Mr. Mukherjee pointed out that the global economic crisis happened because ordinary people did not understand adjustable rate mortgages or risks associated with credit card debt. “Financial markets now offer complex choices to consumers, but literacy is essential for consumers to make informed choices,” he remarked.
The Finance Minister said it was important to focus attention on financial literacy initiatives for children. He complimented the RBI for launching a financial literacy project among school children in the State.
Mr. Mukherjee said efforts to improve literacy should take into account India's “the divergent and multi-lingual framework”. The wide divergence in literacy levels across States and within States, the marked differences between rural and urban areas are also important issues in India, he said. The “perceptible variation in the penetration of banking across regions,” was also an important factor, he added.
RBI Governor D. Subbarao said the OECD had been an ‘intellectual leader' in the field of financial literacy. “The OECD is by far the most valuable repository of knowledge on grassroots experiments in financial literacy,” he added.
OECD Deputy Secretary General Richard Boucher said financial literacy improved the access to financial services, especially for the poor. Over time, risk had shifted from governments and corporations to individuals, he pointed out. Managing risks required individuals to be able to access to information that enabled comparison of the various choices on offer, he added.
Dr. Subbarao said the 25-basis point hike in the repo rate and the reverse repo rate effected on Friday might result in “sacrificing a little bit of growth in the near term, but would prevent a more severe adjustment in the medium to long-term. The RBI had to take note of the latest “inflation numbers”, which showed that inflationary pressures were no longer confined to food articles, he said.
Dr. Subbarao said the inflation rate of non-food manufactured goods accounted for 50 per cent of the overall inflation in February (data that became available in March), whereas in November they accounted for -0.4 per cent of the overall inflation in November 2009. The share of fuel products in overall inflation increased from – 0.8 per cent in November to 10.2 per cent in February.
Having found that headline inflation had increased to 9.9 per cent in February — against a March target of 8.5 per cent — the RBI chose not to wait for the customary monetary policy review to hike the policy rates, Dr. Subbarao said.
Asked why the RBI was averse to using selective credit controls to tame inflation, Deputy Governor Subir Gokarn said the “instrument belongs to the past” and was inconsistent with the current policy regime.