Financial protection must come first, bank credit last to avoid crisis: Rajan

New Delhi: Programmes like the government’s financial inclusion initiative need to be complemented with those of financial protection and literacy to be fully effective, Reserve Bank of India Governor Raghuram Rajan said Friday.

“Financial inclusion means reaching out to the unsophisticated, who are easier to be preyed upon. So such programmes have to work on both their financial protection and financial literacy,” Rajan told reporters at an India Habitat Centre lecture.

“The consumer protection and grievance redressal mechanism across the country need to be improved,” he added.

Citing the US’ “sub-prime” housing loan crisis that provoked the 2008 financial crisis as an example of lending to people low on the economic ladder, Rajan said credit should come last in the sequencing of financial inclusion.

“Other protection like insurance should come before, to be followed last by bank credit. Otherwise there is the risk of consequences - like the over-indebtedness in Andhra Pradesh,” he said.

Over 190 million accounts have been opened under the Jan Dhan financial inclusion scheme, with around 38 percent of these being zero-balance accounts, and the government is looking to extend the cash transfers scheme to other subsidy programmes too.

IANS