Authors: Bindu Ananth & Nachiket Mor
Financial inclusion is an important objective for the financial system for a variety of reasons including: better alignment of financial sector signals and real sector with respect to allocation of resources, allowing people to smooth consumption across time and enable diversification of risks for households. However it needs to be achieved in a manner that it does not impair the systemic stability of the financial system and its ability to offer a high degree of depositor protection .
The objective function may therefore be defined as: maximise (financial inclusion) subject to a high degree of depositor protection and systemic stability. The two constraints are in turn a function respectively of solvency of financial institutions and liquidity in the financial system and alternate designs for financial inclusion would need to be evaluated using these two dimensions.