Excessive financialisation can hurt real economy: Economic Survey

Stating that financial markets must grow in line with the real economy and not faster than the economy’s capital needs and overall economic growth, the Economic Survey has warned that excessive financialisation can hurt the real economy as it comes with attendant risks to the overall financial system.

The survey has also called for banks to enhance their capabilities to meet the demands of new-age households and the digital economy while maintaining their primary credit creation function.

Economic survey is the latest to flag the risks of retail investors playing on the complex derivatives products and even borrowing to invest in the market or play on the derivatives. This has led the Reserve Bank to ask bank to go slow on personal loans which finally led the regulator to impose an additional 25 percentage points risk capital on such loans, from November 2023 when it was 100%. This had unsecured loans growth plummeting to high single digits now from over 30 percent before the clampdown.

“While there is evidence of increasing reliance on the financial markets as a funding source, the financial markets must work in tandem with the banking sector to bridge the capital requirement gap. The financial markets must grow in line with, but not faster than, the economy’s capital needs and overall economic growth,” the survey said.

“Excessive financialisation can hurt the economy. The costs may be particularly high for a low-middle-income country like ours. We must prepare ourselves with appropriate regulatory and government policy measures to intervene and mitigate these risks when necessary,” the survey said.