COMPETITION & REGULATION REFORMS
IN INDIAN FINANCIAL SECTOR
Amol Kulkarni
CUTS International
Background
 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
Banking
RBI
NBFCs
Insurance
RBI, SEBI
IRDA
Regulation, Competition, and Consumer Protection
Learnings from financial crisis
Issues for discussion and way forward
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Getting started
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Entry and performance conditions
 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
 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
 No judicial or quasi-judicial appellate body
 Appeal to Central Government within 30 days
 Writ courts don’t get into merits
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Managing competition
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Preference to public sector
 Exclusion of general corporate laws
 Winding up provisions
 Explicit and implicit privileges
 LIC - government guarantee
 Implicit deposit guarantee - 80% ICRR respondents believed
government won’t 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
 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
 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
11.54
3.85
Inter-regulatory coordination without
third party involvement
Inter-regulatory coordination at FSDC
23.08
61.54
Macro-economic supervision and dispute
resolution by FSDC
Don't know/Can't say
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Dealing with consumers
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Unfair business practices
 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
 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?
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Developments at home
 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
 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
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Issues for discussion
 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?
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Demands of ICRR respondents
Establishment of a unified regulator for
financial sector
Creation of a super regulator over and above
existing regulators
3.77
13.21
20.75
Clarity in objectives of each of the existing
regulators
9.43
18.87
Increase in power of each of the existing
regulators
Improving accountability of each of the
existing regulator
18.87
15.09
Improving coordination and communication
between existing regulators
Don't know/Can't say
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THANK YOU
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