In section 2, theoretical considerations based on a literature review in the context of development economics are discussed in support of the institutional reforms drawn from the new institutional economics. Many empirical studies have established the significant role of the formal banking sector for inclusive growth (Rajan & Zingales, 1998; Beck, Levine, and Loayza 2000; Levine, 2005; Beck, Demirguc-Kunt, and Levine 2007). Most of the existing research focuses on country case studies that aim to measure and analyze access to financial services at the household or firm level (Claessens, 2006; Claessens & Demirguc-Kunt, 2006).
Below is a discussion of literature related to effective institutions and economic performance, governance reform for institutional development, financial development and poverty reduction, governance and financial regulatory agencies, the role of the state in financial infrastructure, and credit information as a public good. There is a need to target Bottom of the Pyramid (BoP) customers to achieve inclusive banking and in turn to achieve inclusive growth (Beck, Demirguc-Kunt & Martinez Peria, 2008). The global financial crisis has attracted the attention of researchers and policy makers alike to renew their interest in the role of the financial infrastructure in supporting systemic stability.
The active involvement of the state in the financial sector helps to maintain economic stability, promote growth and create jobs. The role of the state in supporting financial infrastructure has changed over time and throughout time. Some examples to support this argument: (1) Argentina as a country uses credit registry information for prudential supervision of its financial institutions, (ii) Egypt removed regulatory barriers to the development of private credit bureaus, (iii) Mexico uses state interventions to prevent market fragmentation and closed user groups, and (iv) Morocco provides public support for the development of a private credit bureau.
It is disturbing to note that the annual growth rate for the credit balance has been experiencing negative growth for most of the post-reform period (roughly up to 2009-10).
Financial Services towards Inclusive Growth
In view of the dynamics of the changing economy, there is a strong need to reform the rural financial system. Regional Rural Banks (RRBs) – the unfinished agenda of India's rural financial system needs to be revived: (i) by freeing them from the clutches of their sponsor banks; (ii) The Government of India, like China, must become proactive in its policies aimed at achieving the larger goals of inclusive growth; (iii) attract new talent at senior management level for professionalization and focus on their activities rather than continuing them as the retirement rooms of the executives of the sponsoring banks. Even after two decades of liberalization and the opening of the banking sector to new generation banks, their level of penetration has not been satisfactory.
Most of the RRBs suffer from incompetent and untrained staff who appear to be inefficient. The implementation of the Action Plan (ADB, 2010) of the revival package was considered to lead to the emergence of a strong, independent and well-organized network of rural cooperative credit system. The implementation of the revitalization package involved planning and executing a series of action plans for (i) the facilitation of legal, regulatory and governance framework; (ii) institutional reforms for sustainability; (iii) financial package and; and (iv) eligibility norms.
However, no noticeable change has been noticed on the ground, which may be due to a lack of political will for the implementation of the reforms. Locally appointed under the influence of the local politicians and government officials, resulting in heterogeneity. The current structure of Indian banking needs to be strengthened by providing financial services to the rural poor.
Moreover, various sub-objectives such as providing finance to the weaker sections of the community such as women and agriculture are required to be rigorously implemented in order to channel the much-needed credit to the rural sector. However, a worrying issue is that of optimizing the performance of microfinance institutions, which depend on the accessibility and sustainability of the financial services provided by these institutions (see Figure 8). Further, the regulatory responsibilities of the microfinance sector should be given to RBI instead of NABARD, as it has failed to evolve itself into a visible, proactive regulator despite its existence since 1982.
Indeed, some of the critics have referred to the functioning of NABARD as that of 'white elephant' in view of its ineffectiveness, but only as a refinancing accountant under the shadow of RBI. There are a variety of ways in which the strengthening of "voice" in general—and the voice of the poor in particular—. Mechanisms must be built into the systems so that there is no room for abuse of the official position or ignorance or indifference or apathy by the employees.
However, the proposed reform measures must be accompanied by simultaneous research in key areas such as (i) what is the true nature of these policies and their potential to influence the functioning of rural financial markets. ii) What measures have been taken to overcome some of the negative consequences of reforms, such as the exclusion of poor and small borrowers, raising the cost of borrowing and the growing influence of informal sources. To what extent have some of the controversial innovations, such as commodity futures and derivatives, benefited farmers? v).
Conclusion
Retrieved from https://www.imf.org/external/np/seminars/eng/2011/res2/pdf/rl.pdf Malegam Committee. Board of Governors of the Reserve Bank of India to study issues and concerns in the MFI sector. Paper presented at the Ninth Annual Conference of the International Association for New Institutional Economics, Barcelona, 22-24 September 2005. https://www.uwlax.edu/economics/ new-institutional-economics-and-economic-history-conference /. Goodbye Washington Consensus, Hello Washington Confusion.
Text of speech by Deputy Governor, Reserve Bank of India at HMT-DFID Financial Inclusion Conference 2007, Whitehall Place, London, UK, 19 June. Government of India, Ministry of Finance, New Delhi https://www.nabard.org /demo/auth/write readdata/ File/DCRR%20-%20Annexures.pdf. Reforms in Institutional Finance for Inclusive Growth in India 85 Annexure 1: A Glimpse of the Banking Sector in India.
Continued)
