16.11.2011 (UNI) The Reserve Bank of India (RBI) Governor D Subbarao has said the financial sector of a country should be driven by the 'real' sector of an economy comprising supply and demand of goods, services and labour rather than the other way round.

He said Economic growth generates demand for financial services and spurs financial sector development. In the reverse direction, the more developed the financial sector, the better it is able to allocate resources and thereby promote economic development.

'In India, we have experienced causation in both directions. We embarked on wide ranging economic reforms following a balance of payment crisis in 1991. Very soon we realized that the growth impulses generated by the liberalizing regime could not be sustained unless we also undertook financial sector reforms. That is an illustration of growth triggering financial sector development', Dr Subbarao said.

He was delivering the inaugural address at the first CAFRAL-BIS (Centre for Advanced Financial Research and Learning and Bank for International Settlements) international conference on ‘Financial Sector Regulation for Growth, Equity and Stability in the Post Crisis World’ here yesterday. To exemplify his point, Subbarao said that over the last 50 years in the United States, the share of value added from manufacturing in gross domestic product (GDP) fell by more than half from around 25 percent to 12 percent , while the share of financial sector more than doubled from 3.7 percent to 8.4 percent.

The RBI has promoted 'socially optimal business behaviour', including priority sector lending, lead bank scheme, licensing of branches, as well as striving towards financial inclusion that aims to take banking services to far-flung areas of the country, he said.

The extent of financial exclusion is staggering. Out of the 600,000 habitations in India, less than 30,000 have a commercial bank branch. Just about 40 percent of the population across the country have bank accounts, and this ratio is much lower in the north-east of the country,' Subbarao said.

The government aims to bring in 80 percent of Indian households into the formal banking network in next five years, up from 47 percent at present under the financial inclusion drive. UNI