Regulators need to manage trade offs between fin resilience and efficiency

The Economic Survey said regulators need to manage trade-offs between financial resilience and efficiency. It said that a system where banks maintain high reserve ratios and only lend to the most creditworthy borrowers may exclude smaller households and businesses from accessing credit.“On the one hand, building financial resilience would entail higher capital buffers, stricter regulations and reduced risk-taking. On the other hand, this would lead to lower financial growth by limiting profitable investments and innovation. For instance, a system where banks maintain high reserve ratios and only lend to the most creditworthy borrowers may exclude smaller households and businesses from accessing credit,” the survey said.

Regulators will need to play a delicate balancing act between the goals of financial resilience and growth. For emerging markets like India which still have to undertake large-scale financial inclusion and at the same time, reduce vulnerability to crises, manging this trade-off is especially significant.

The survey said that regulatory innovations that use technology such as unified ledgers and digital infrastructure can help advance financial efficiency without compromising on resilience. “Emerging markets such as Brazil and Thailand were making positive steps towards advancing such as technology in their financial system. In India’s case, innovations such as the OCEN (Open Credit Enablement Network) framework and the ULI (Unified Lending Interface) provide access to realtime information on the risk profiles of debtors and reduce the need for provisioning based on an overestimation of default risk,” the survey noted.