The AP microfinance crisis has raised significant questions on the design of the financial system that best ensures inclusion. The crisis has revealed deep discomfort with the regulation of Non-Deposit taking Institutions (NDI). Some observers have equated NDIs to moneylenders. In this draft paper, Nachiket and Bindu analyse the various design choices we have and as a thought experiment, test them for likely impact in terms of solvency and liquidity.
They recommend that while the eventual end-state for the Indian financial system would be to have many more Deposit taking Institutions (DIs) offering a full suite of financial services to their clients, the aggressive use of NDIs may be a good interim step that permits for adequate experimentation without sacrificing depositor protection as an objective. In this process the poor quality and the ill intentioned players would be weeded out and then those that survive may be permitted to become full-fledged DIs through formal licensing.
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