, there could be a risk of predatory and irresponsible lending as the sub prime crisis shows. the use of local community based organisations and social capital such as shgs in low - income communities is a way of handling this challenge. it also points out to the fact that interest rates, while covering cost and risk should not be so high so as to add to the risk of default because of high burden. there is thus the need to ensure a fair balance between sustainability of operations through coverage of costs, and interest burden on the borrower. irresponsible lending also highlights the issue of recovery practices, use of agents and the need to be sensitive to the needs of the poor, as in majority of cases there is no intent to default. in this context, the need for affordable health, accident and life insurance as part of a slew of products for financial inclusion, in addition to financial education and credit counselling, cannot be overstated. this brings me to the second lesson viz. the issue of subsidised credit ; in this context, i would like to quote from a recent speech by governor dr. y. v. reddy 11 : " interest rates have been deregulated to a significant degree not only to aid movement of monetary policy to the use of more effective indirect instruments, but also because administered interest rate regime proved to be inefficient and costly, without necessarily ensuring flow of credit to the needy. the rbi ’ s recommended approach, however, does not preclude subsidisation by the government but it disfavours excessive use of banking system to cross subsidise, especially if it were to favour non - poor. rbi favours a financial system that provides incentives to encourage flow of credit at justifiable terms and conditions and for purposes that ensure servicing of interest and principal, i. e., bankability of schemes. there has been broad agreement between the government and the rbi on the above approach, and accordingly, subsidies on interest rates through the banking system to small farmers and small exporters are currently provided for a limited period. there are several governmentsponsored programmes intended for the vulnerable sections and these are small - sized loans for which government provides subsidy, particularly for employment generation. thus, the financial sector, in particular the banking system, is utilised as a conduit by the government ’ s fiscal policy, to subsidise select activities or vulnerable sections, and rbi plays a supporting role

staff macroeconomic projections – but also those of other organizations – see a further rebound in gdp growth to take place in 2010 and 2011. this notwithstanding and taking a longer term perspective, i believe that more is needed for this recovery to be solid, sustainable and long lasting. so let me outline which policies – in my view – are needed to achieve good prospects of long term growth with at the same time ensuring both, price stability and financial stability. in the following, i will mention four policy elements. first, the strengthening of growth prospects through structural reforms. second, fiscal consolidation aiming at sustainable fiscal positions. third, monetary policy geared towards price stability and finally a comprehensive reform of the financial sector. first, strengthening growth prospects. structural reforms leading to higher growth and employment are crucial to support a sustainable recovery. we know very well that structural reforms pay off. for instance, measures which increase competition in the consumer markets can curtail monopoly rents and lead to higher employment and output. the introduction of the single market, for instance, has – according to estimates of decreased monopoly rents by a quarter. 1 studies have also found that this may have increased potential output in the range of 5 – 10 percent. 2 also labour market reforms, such as for instance an adjustment of the unemployment benefit replacement ratio by 5 percentage points has been estimated to give rise to 1. 5 % more output and 1. 7 % more employment over a period of 5 years. 3 therefore, policies to enhance competition and innovation are needed to speed up restructuring and investment and to create new business opportunities. increased labour market flexibility, but also investments in education and research are required to create employment opportunities and enhance competitiveness. restructuring of the banking sector, aiming at solid business models, better risk management and increased transparency will be key. in this respect, the european commission has recently put forward its europe 2020 strategy. the aim of this strategy is to deliver higher levels of employment, productivity and social cohesion. europe can come out stronger from the crisis, if it seizes this opportunity to implement the reforms that are necessary. second, fiscal sustainability. sound public finances are the basis for an economy to prosper and to develop in a sustainable way. this is particularly important in a monetary union, such as the euro area, where sixteen individual countries have a common monetary policy. a number of euro area governments have adopted fiscal consolidation measures and set out ambitious fiscal targets. on 7 june, the euro area finance ministers agreed on the spring 2010 orientations for