COMPETITION & REGULATION REFORMS IN INDIAN FINANCIAL SECTOR
Amol Kulkarni CUTS International
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Background 2 India Competition and Regulation Report National
reference group Secondary research Expert comments Perception
surveys perception index
http://www.cuts-ccier.org/icrr/icrr.htm
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Outline 3 BankingRBI NBFCsRBI, SEBI InsuranceIRDA Regulation,
Competition, and Consumer Protection Learnings from financial
crisis Issues for discussion and way forward
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Getting started 4
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Entry and performance conditions 5 Minimum capital and reserve
requirements Prudential norms - capital adequacy and market
discipline Income recognition, asset classification and
provisioning Fit and proper test for directors Goodhart Committee
(2012), Risk management concerns of individual banks are quite
different from those of regulators. It should not be for the
government/ regulators, to try to determine how much risk market
participants take on board, nor to set out the particular way that
they assess such risks.
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Regulatory discretion 6 Impose additional conditions Reject
application - eg. NBFCs licence may be issued subject of such
conditions as the [regulator] may think fit to impose. any other
condition, the fulfilment of which would, in the opinion of the
[regulator], be necessary to ensure the carrying on of business
that the public interest shall be served by the grant of
certificate of registration
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Inadequate grievance redressal 7 No judicial or quasi-judicial
appellate body Appeal to Central Government within 30 days Writ
courts dont get into merits
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Managing competition 8
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Preference to public sector 9 Exclusion of general corporate
laws Winding up provisions Explicit and implicit privileges LIC -
government guarantee Implicit deposit guarantee - 80% ICRR
respondents believed government wont let public sector entities
fail Access to public funds - Rs. 14,000 cr. in 2013-14 High NPAs
(3.84% v. 1.91%) Low ROA (0.78% v. 1.63%)
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Differential regulation of NBFCs 10 Lighter regulation for
NBFCs Relaxed prudential norms and less approvals 46% ICRR
respondents believed creates uneven playing field RBI working group
on NBFCs (2011) No benefits under SARFAESI Act Inadequate tax
benefits (TDS and indirect tax) - MoF Report Recent experiences
show that such shadow banking entities can pose potential threats
to long term financial stability if their transactions connect to
banks, the banking system, or asset markets EU Banking Sector
Expert Group (2012)
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Regulatory co-ordination 11 Amongst financial regulators
Bancassurance guidelines Linked insurance products Securities Laws
(Amendment) Ordinance, 2013 With Competition Commission of India
Proposed amendment on mandatory consultation Banking Laws
(Amendment) Act, 2012 For systemic regulation Role of Financial
Stability and Development Council
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Systemic regulation 12
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Dealing with consumers 13
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Unfair business practices 14 Product bundling 49% ICRR
respondents perceived it to be unfavourable practice Misselling
Inappropriate product Unreasonable charges Fraudulent entities Kay
Review (2012), identified short-termism as principal problem.
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Unsatisfactory implementation 15 Non-availability of comparison
Complex KYC requirements Prohibitory for excluded class Duplicity
and cumbersome Ineffective Ombudsman One of the outcomes of
financial crisis in severely affected economies was realisation of
loss of trust born of profound lapses in banking standards retail
and business customers alike are often denied sufficient choice or
access to enough information to exercise effective judgment.
Parliamentary Commission on Banking Standards, UK (2013)
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Learning from crisis? 16
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Developments at home 17 Bank Licensing Guidelines (February
2013) it may not be possible for RBI to issue licenses to all the
applicants meeting the eligibility criteria RBI Discussion Paper on
Banking Structure (August 2013) it is important that the entry
norms should be stringent so as to encourage entry by only
well-qualified entities in order to improve the quality of the
banking system RBI Scheme for WOS by foreign banks (November 2013)
Reciprocity, single mode of presence, and near national
presence
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Developments abroad 18 Twin peak model Dodd-Frank Act Make
banking boring Simple financial products and suitability
requirements The regulators must only focus on maintaining
competition, managing information asymmetry, and systemic concerns,
Geneva reports (2009)
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Issues for discussion 19
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Issues for discussion 20 Need for reforms? What kind of
reforms? Taking in account expanding needs of Indian economy Global
financial sector back to the basics Are we going in circles? Is
this the law of nature?
