National Competition Policy and Economic Growth

COMPETITION & REGULATION REFORMS IN INDIAN FINANCIAL SECTOR

Amol Kulkarni CUTS International

Background2India Competition and Regulation Report

National reference group

Secondary research

Expert comments

Perception surveys perception index

http://www.cuts-ccier.org/icrr/icrr.htm

Outline3BankingRBINBFCsRBI, SEBIInsuranceIRDARegulation, Competition, and Consumer ProtectionLearnings from financial crisisIssues for discussion and way forwardGetting started4

Entry and performance conditions5 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.

Regulatory discretion6 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

Inadequate grievance redressal7 No judicial or quasi-judicial appellate body

Appeal to Central Government within 30 days

Writ courts dont get into merits

Managing competition8

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%)

Differential regulation of NBFCs10 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) Regulatory co-ordination11 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

Systemic regulation12Dealing with consumers13

Unfair business practices14 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.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)

Learning from crisis?16

Developments at home17 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

Developments abroad18 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)

Issues for discussion19

Issues for discussion20 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?Demands of ICRR respondents2122THANK YOU