This presentation was prepared for the E-BUSINESS COURSE taught by Prof. Vijay Shrotriya. This presentation covers the regulated aspects of the bitcoin currency. There is a large shady marketplace for bitcoins that is unregulated and exists outside of USA and Australia. Regulating the dark market is difficult due to the decentralized nature of the bitcoin. However, proactive and corrective actions such as those taken in USA and Australia are necessary to check the growth of the dark markets which are unregulated. Turning a blind eye to these dark exchanges is not going to solve the problem of money laundering using the bitcoin which is often time used by drug dealers and terrorist networks.
Business Analysis and Research Lab SICSR
Showing posts with label regulations. Show all posts
Showing posts with label regulations. Show all posts
Tuesday, September 15, 2015
Wednesday, September 9, 2015
A Hundred Small Steps (Contd.): Market reforms within existing legal and institutional framework
First a comment on my previous blog post in this series: Creating Liquid and Efficient Markets
"Consider the last 2 weeks turmoil in the financial markets. On Aug 24 the markets dropped by around 1000 points as fears from slow down in China and the US rate increases created a flight to safety in the markets. As the money moved out of Indian equities, the Rupee dropped to a 12 month low to 67 to a US Dollar. Subsequently, as the rate hike fears in USA were eased and the Chinese government reduced the rates, the markets recovered and so did the Rupee to 65 to a US Dollar. Now suppose we had a robust and liquid corporate bond market open to foreign investors. The money that moved out of equities at the start of the down swing, would have moved into corporate bonds and the Rupee would not have been hit so hard."
The suggestions given in the section on market refoms have been alluded to in earlier sections of the report and so have been superficially covered in the previous blog posts in this series. I find the treatment in the report to be very complete and am unable to contribute to the suggestions expressed in any way. So I would suggest the reader to read this section on the report on pages 133 to 135 here: A Hundred Small Steps: Raghuram Rajan
Thursday, August 6, 2015
A Hundred Small Steps (contd. Part 7)
This blog post is in continuation of the previous blog posts on Raghuram Rajan's report titled "A Hundred Small Steps" written in 2008 whilst he was with the Planning Commission of India.
The next section of the report describes " The Macroeconomic Framework and Financial Sector Development."
The section discusses the impact of capital flows and Real Effective Exchange Rate (REER) on the economy in India.
We have published a paper titled "The Impact Of Rupee Exchange Rate on Business Opportunities in India" in the IOSR Journal of Economics and Finance that describes the effects of a rapidly depreciating Rupee as was seen in 2012-14 period.
Link to previous blog post in this series: A Hundred Small Steps: Part 6
Next blog post in this series: A Hundred Small Steps: Part 8
The next section of the report describes " The Macroeconomic Framework and Financial Sector Development."
The section discusses the impact of capital flows and Real Effective Exchange Rate (REER) on the economy in India.
We have published a paper titled "The Impact Of Rupee Exchange Rate on Business Opportunities in India" in the IOSR Journal of Economics and Finance that describes the effects of a rapidly depreciating Rupee as was seen in 2012-14 period.
The paper can be downloaded here: IOSR Journal of Economics and Finance: "The Impact Of Rupee Exchange Rate on Business Opportunities in India"
Link to previous blog post in this series: A Hundred Small Steps: Part 6
Next blog post in this series: A Hundred Small Steps: Part 8
Wednesday, August 5, 2015
A Hundred Small Steps (contd. Part 6)
This blog post is in continuation of the previous blog posts on Raghuram Rajan's report titled "A Hundred Small Steps" written in 2008 whilst he was with the Planning Commission of India.
The third section of the report focuses on "Creating a robust infrastructure for credit."
Proposal 29: Expedite the process of creating a unique national ID number with biometric identification.
The AADHAR Unique Identification number brings us one step closer to this ideal. However there are serious concerns over the integrity and confidentiality of the data in the AADHAR database as is highlighted in this story from CIO.IN: Reduce your risk by refusing to link AADHAR to any databases.
Proposal 30: The Committee recommends movement from a system where information is shared primarily amongst institutional credit providers on the basis of reciprocity to a system of subscription, where information is collected from more sources and a subscriber gets access to data subject to verification of ‘need to know and authorization to use’ of the subscriber by the credit bureau.
We could introduce a FICO style credit rating system found in USA with access to credit scores provided to businessess on consent of the individuals' consent. FICO scores are used for setting interest rates on home and car loans for individuals in USA.
Proposal 31: Ongoing efforts to improve land registration and titling—including full cadastral mapping of land, reconciling various registries, forcing compulsory registration of all land transactions, computerizing land records, and providing easy remote access to land records—should be expedited, with the Centre playing a role in facilitating pilots and sharing experience of best practices. The Committee also suggests the possibility of special law courts to clear the backlog of land disputes be examined.
Here I would like to mention an article by Dr. Anupam Saraph in MONEYLIFE on 10 digital solutions that can make India the best governed nation. One of the 10 ideas is to protect the country from land mafia. The suggestion is as follows:
"There is no public directory or map of all the survey numbers of the 32.87 lakh square km across the 595 districts in the country. There is no account of the changes happening in land use across the country. Land records and property records are not standardized across the country. Requiring that all survey maps be geo-tagged, or their exact location on the district map be shown based on latitude and longitude, and display the survey land-use, ownership details, and any legal issues on a single website survey.gov.in will change the way land use happens across the country. Requiring that the North East point of every property have an official GPS device on it will alert a land use information system of any movement of this point."
Proposal 32: Restrictions on tenancy should be re-examined so that tenancy can be formalized in contracts, which can then serve as the basis for borrowing.
The GPS markers suggested above could be used for unique identification of land plots and these could be coupled unique identities for individuals to generate unique land contracts.
Proposal 33: The powers of SRFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) that are currently conferred only on banks, public financial institutions, and housing finance companies should be extended to all institutional lenders.
ARCs have additional powers such as step-in rights and the ability to change management, and the right to sell or lease the business. Given these additional powers, it is important that a number of ARCs flourish so that no single ARC has excessive power. There is really no sensible case to keep foreign
direct investment out of ARCs. The kind of risk capital as well as the kind of expertise foreign investors bring is useful in the economy, and can help provide a valuable buffer. From an economic perspective, capital that comes into the country when the banking sector is distressed and a flood of assets are sold to ARCs, is particularly valuable, and foreign investors, not domestic financial institutions, are most likely to be flush with capital at those times.
There are venture capital firms such as Bain Capital that specialize in leveraged buyouts of debt ridden sick companies and turn them around, selling them subsequently for a good profit. Asset Reconstruction Companies should follow a similar business model and there could be potential for growth here.
Proposal 34: Encourage the entry of more well-capitalized ARCs, including ones with foreign backing.
This could lead to better results since a new management model might be what is needed to turn around some these companies and NPAs.
Proposal 35: The Committee outlines a number of desirable attributes of a bankruptcy code in the Indian context, many of which are aligned with the recommendations of the Irani Committee. It suggests an expedited move to legislate the needed amendments to company law.
There is a need for a consolidated bankruptcy law in India, in line with the Chapter 11 in USA. The National Company Law Tribunal has laid certain conditions on bankruptcy proceedings for sick companies.
A Hundred Small Steps (contd. Part 5)
This blog post is in continuation of the previous blog posts on Raghuram Rajan's report titled "A Hundred Small Steps" written in 2008 whilst he was with the Planning Commission of India.
The second section of the report focuses on "Creating A Growth Friendly Regulatory Environment."
Proposal 20: "Rewrite financial sector regulation, with only clear objectives and regulatory principles outlined. However, such legislation would have to be drafted carefully, as Indian courts are
not likely to look upon excessive delegation favourably (the Supreme Court of India has held that the ‘essential legislative function’ cannot be delegated and a statutory delegate cannot be given an unguided or un-canalized power). What should be left to the regulator is the ancillary function of providing the details."
--There have been a lot of developments in this field since the Financial Crisis of 2008. USA implemented the Dodd-Frank Regulations wherein banks were forbidden from trading with their own money to reduce systemic risks. This has led to reduced economic activity in the financial space but considering the impact of the crisis, this might be the right way to go.
Another important regulation in this area is the Glass-Steagall Act in USA from 1992. This made a clear demarcation (fire wall) between retail banking and investment banking and did not allow the two to mix. This restriction was lifted in an amendment in 1999, just before the dot com bubble burst.
The Canadian banking regulations are also noteworthy since not a single Canadian Bank failed during this crisis and there was no government intervention needed.
Even the Indian banks were pretty resilient at the time of the crisis and the banking system received significant recognition for its resilience.
Proposal 21: Parliament, through the Finance Ministry, and based on expert opinion as well as the principles enshrined in legislation, should set a specific remit for each regulator every five years. Every year, each regulator should report to a standing committee (possibly the Standing Committee on Finance), explaining in its annual report the progress it has made on meeting the remit. The interactions should be made public. In addition, to ensure there are more direct checks on the regulator in a system that is less rule-bound, the Committee recommends Proposal 22.
--This would be like oversight of the regulators. I don't think such a body exists in most countries. At the highest level, regulatory authorities are accountable to the Prime Minister (President) of the country and serve at his / her discretion. They should be allowed to be independent.
Proposal 22: Regulatory actions should be subject to appeal to the Financial Sector Appellate Tribunal, which will be set up along the lines of, and subsume, the Securities Appellate Tribunal.
I don't think the top regulators in USA are accountable to any one other than the President, be it the Consumer Financial Protection Bureau or the FDIC. No doubt, they are subject to Parliamentary investigations and probes if their actions are found to conflict with the interests of the businesses to an unacceptable level.
Proposal 23: Supervision of all deposit taking institutions must come under the RBI. Situations where responsibility is shared, such as with the State Registrar of Cooperative Societies, should gradually cease. The RBI will have to increase supervisory capacity to take on this task. The Committee recognizes this involves constitutional issues but nevertheless recommends a thorough overhaul of the system of shared responsibility.
I think the regulation of financial institutions should be left to the watchdogs like the Securities and Exchange Board of India. I don't see a reason why this power should fall with the RBI.
Proposal 24: The Ministry of Corporate Affairs (MCA) should review accounts of unlisted companies, while SEBI should review accounts of listed companies.
Whilst the publicly listed companies are under the review of SEBI at present, the unlisted companies are not regulated or supervised. It might be a good idea to have unlisted public companies to be under review of a regulatory agency, but their identification would be very difficult since they are unlisted.
Proposal 25: A Financial Sector Oversight Agency (FSOA) should be set up by statute. The FSOA’s focus will be both macro-prudential as well as supervisory; the FSOA will develop periodic assessments of macroeconomic risks, risk concentrations, as well as risk exposures in the economy; it will monitor the functioning of large, systemically important, financial conglomerates; anticipating potential risks, it will initiate balanced supervisory action by the concerned regulators to address those risks; it will address and defuse inter-regulatory conflicts.
This would be a role more suited for the RBI rather than the that of a watchdog or regulator.
Proposal 26: The Committee recommends setting up a Working Group on Financial Sector Reforms with the Finance Minister as the Chairman. The main focus of this working group would be to shepherd financial sector reforms.
Special Focus Groups are a good means to deal with complex legislative issues and there should be such groups for almost all sectors. They should comprise of a eminent industrialists, academics and a few elected politicians from the Lok Sabha and Rajya Sabha.
Proposal 27: Set up an Office of the Financial Ombudsman (OFO), incorporating all such offices in existing regulators, to serve as an interface between the household and industry.
The subject of ombudsman has been raised by a lot of parties in recent times, prominent amongst them being AAP. This would be a good idea as it would set up a feedback channel from the industry participants to the focus groups and other legislative agencies.
Proposal 28: The Committee recommends strengthening the capacity of the Deposit Insurance and Credit Guarantee Corporation (DICGC) to both monitor risk and resolve a failing bank, instilling a more explicit system of prompt corrective action (see Proposal 3), and making deposit insurance premia more risk-based.
The FDIC insures all deposits of constituent banks and imposes a certain set of regulations in return. We could try a similar model. Also, bankruptcy laws are in the process of being consolidated with the Madras Court Tribunal (MCLT) and other central bankruptcy regulations having overlapping authorities. A consolidated bankruptcy law such as the Chapter 11 in USA is needed in India.
In the next post, I will discuss the next section on "Creating Robust Infrastructure for Credit" from the same report.
A Hundred Small Steps (contd. Part 4)
This blog post is in continuation of the previous blog posts on Raghuram Rajan's report titled "A Hundred Small Steps" written in 2008 whilst he was with the Planning Commission of India.
Proposal 16: "Create the concept of one consolidated membership of an exchange for qualified investors (instead of the current need to obtain memberships for each product traded). Consolidated membership should confer the right to trade all the exchange’s products on a unified trading screen with consolidated margining." -This should make it easier for small businesses to register and trade with the exchanges. Fees always act to reduce economic activity for the activity the fee is charged for. Lower fees and consolidation of fees would lead to more economic activity in the space.
Proposal 17: "Encourage the setting up of ‘professional’ markets and exchanges with a higher order size, that are restricted to sophisticated investors (based on net worth and financial knowledge), where more sophisticated products can be traded." -This would lead to creation of niche markets with lack of access for the entire business community. This would not create equal opportunities for all sizes of investors. So it would be difficult to support such a proposal. Such structures are usually seen in dark pools of high speed trading and they have come for considerable criticism from regulatory agencies.
Proposal 18: "Create a more innovation friendly environment, speeding up the process by which products are approved by focusing primarily on concerns of systemic risk, fraud, contract enforcement, transparency and inappropriate sales practices. The threshold for allowing products on professional exchanges (see Proposal 16) or Over the Counter markets should be lower, so that experimentation
can take place." There should not be barriers to entry for new investment products that reduce systemic risk. Trading of collateralized debt obligations (CDOs) or rated covered bonds on home loans as seen in Europe and USA is absent in India. They act as means to finance home and infrastructure loans. Probably such products could be introduced through this mechanism.
Proposal 19: "Allow greater participation of foreign investors in domestic markets as in Proposal 2. Increase participation of domestic investors by reducing the extent to which regulators restrict an institutional investor’s choice of investments. Move gradually instead to a ‘prudent man’ principle where the institutional investor is allowed to exercise judgement based on what a prudent man
might deem to be appropriate investments. Emphasize providing access to suitable equity linked products to the broader population as part of the inclusion agenda." More access for mom and pop investors could conflict the proposal 17 above. I do not support proposal 17 any way.
Next post will be on "Creating a Growth Friendly Regulatory Environment" as has been covered in the report.
Link to previous blog post in this series: A Hundred Small Steps: Part 3
Next blog post in this series: A Hundred Small Steps: Part 5
Proposal 16: "Create the concept of one consolidated membership of an exchange for qualified investors (instead of the current need to obtain memberships for each product traded). Consolidated membership should confer the right to trade all the exchange’s products on a unified trading screen with consolidated margining." -This should make it easier for small businesses to register and trade with the exchanges. Fees always act to reduce economic activity for the activity the fee is charged for. Lower fees and consolidation of fees would lead to more economic activity in the space.
Proposal 17: "Encourage the setting up of ‘professional’ markets and exchanges with a higher order size, that are restricted to sophisticated investors (based on net worth and financial knowledge), where more sophisticated products can be traded." -This would lead to creation of niche markets with lack of access for the entire business community. This would not create equal opportunities for all sizes of investors. So it would be difficult to support such a proposal. Such structures are usually seen in dark pools of high speed trading and they have come for considerable criticism from regulatory agencies.
Proposal 18: "Create a more innovation friendly environment, speeding up the process by which products are approved by focusing primarily on concerns of systemic risk, fraud, contract enforcement, transparency and inappropriate sales practices. The threshold for allowing products on professional exchanges (see Proposal 16) or Over the Counter markets should be lower, so that experimentation
can take place." There should not be barriers to entry for new investment products that reduce systemic risk. Trading of collateralized debt obligations (CDOs) or rated covered bonds on home loans as seen in Europe and USA is absent in India. They act as means to finance home and infrastructure loans. Probably such products could be introduced through this mechanism.
Proposal 19: "Allow greater participation of foreign investors in domestic markets as in Proposal 2. Increase participation of domestic investors by reducing the extent to which regulators restrict an institutional investor’s choice of investments. Move gradually instead to a ‘prudent man’ principle where the institutional investor is allowed to exercise judgement based on what a prudent man
might deem to be appropriate investments. Emphasize providing access to suitable equity linked products to the broader population as part of the inclusion agenda." More access for mom and pop investors could conflict the proposal 17 above. I do not support proposal 17 any way.
Next post will be on "Creating a Growth Friendly Regulatory Environment" as has been covered in the report.
Link to previous blog post in this series: A Hundred Small Steps: Part 3
Next blog post in this series: A Hundred Small Steps: Part 5
A Hundred Small Steps (contd. Part 3)
This blog post is in continuation of the previous blog posts on Raghuram Rajan's report titled "A Hundred Small Steps" written in 2008 whilst he was with the Planning Commission of India.
Proposal 11: Free banks to set up branches and ATMs anywhere. "Domestic banks have not had the freedom to set up branches anywhere thus far, and will not have anticipated such liberalization (which was not an element of the RBI roadmap). Given that foreign banks have deeper pockets, experience, and skills relative to domestic banks in rolling out a branching strategy in the newly liberalized environment, the Committee believes it necessary to allow a period of say two years from the announcement of the policy till the liberal licensing policy applies to domestically incorporated subsidiaries of foreign banks." -- I cannot see a reason why banks should not be allowed to open new ATM branches at their will.
Proposal 12: "Allow holding company structures, with a parent holding company owning regulated subsidiaries. The holding company should be supervised by the Financial Sector Oversight Agency (see later), with each regulated subsidiary supervised by the appropriate regulator. The holding company should be well diversified if it owns a bank." -- This was allowed in India till a recent government regulation made it mandatory for holding companies to get a banking license and L&T Holdings was not able to get a banking license. List of holding companies looking for a banking license right now: 23 holding companies looking for a banking license
Proposal 13: "Bring all regulation of trading under the Securities and Exchange Board of India (SEBI). In areas where multiple regulators share concerns about a market (for example, RBI has a legitimate interest in the government bond market), regulators will have to cooperate even after the supervision of trading moves to SEBI." - A single regulator would definitely make regulations clearer and remove any ambiguity from overlapping authorities.
Proposal 14: "Encourage the introduction of markets that are currently missing such as exchange traded interest rate and exchange rate derivatives." This would help exporters and importers hedge their currency risks significantly.
Proposal 15: "Stop creating investor uncertainty by banning markets. If market manipulation is the worry, take direct action against those suspected of manipulation." -- There should be transparency and oversight of market operations to ensure manipulation does not happen. Strict fines could help contain such activities.
Link to previous blog post in this series: A Hundred Small Steps: Part 2
Next blog post in this series: A Hundred Small Steps: Part 4
Proposal 11: Free banks to set up branches and ATMs anywhere. "Domestic banks have not had the freedom to set up branches anywhere thus far, and will not have anticipated such liberalization (which was not an element of the RBI roadmap). Given that foreign banks have deeper pockets, experience, and skills relative to domestic banks in rolling out a branching strategy in the newly liberalized environment, the Committee believes it necessary to allow a period of say two years from the announcement of the policy till the liberal licensing policy applies to domestically incorporated subsidiaries of foreign banks." -- I cannot see a reason why banks should not be allowed to open new ATM branches at their will.
Proposal 12: "Allow holding company structures, with a parent holding company owning regulated subsidiaries. The holding company should be supervised by the Financial Sector Oversight Agency (see later), with each regulated subsidiary supervised by the appropriate regulator. The holding company should be well diversified if it owns a bank." -- This was allowed in India till a recent government regulation made it mandatory for holding companies to get a banking license and L&T Holdings was not able to get a banking license. List of holding companies looking for a banking license right now: 23 holding companies looking for a banking license
Proposal 13: "Bring all regulation of trading under the Securities and Exchange Board of India (SEBI). In areas where multiple regulators share concerns about a market (for example, RBI has a legitimate interest in the government bond market), regulators will have to cooperate even after the supervision of trading moves to SEBI." - A single regulator would definitely make regulations clearer and remove any ambiguity from overlapping authorities.
Proposal 14: "Encourage the introduction of markets that are currently missing such as exchange traded interest rate and exchange rate derivatives." This would help exporters and importers hedge their currency risks significantly.
Proposal 15: "Stop creating investor uncertainty by banning markets. If market manipulation is the worry, take direct action against those suspected of manipulation." -- There should be transparency and oversight of market operations to ensure manipulation does not happen. Strict fines could help contain such activities.
Link to previous blog post in this series: A Hundred Small Steps: Part 2
Next blog post in this series: A Hundred Small Steps: Part 4
A Hundred Small Steps (contd.)
This is in continuation of the previous blog post on a Hundred Small Steps where I analyze the 2008 Planning Commission Report prepared by RBI Governor Raghuram Rajan.
Proposal 6: Liberalize the interest rate that institutions can charge, ensuring credit reaches the poor, but require (i) full transparency on the actual effective annualized interest cost of a loan to the borrower, (ii) periodic public disclosure of maximum and average interest rates charged by the lender to the priority sector, (iii) only loans that stay within a margin of local estimated costs of
lending to the poor be eligible for PSLCs.
"The Committee believes that through a combination of transparency, incentives, and eventually competition, liberalized interest rates to the poor can be kept within reasonable limits, and liberalization would enhance, and improve the sources of, credit to the poor."
--I think this has been pretty much incorporated into the system barring the clause that banks borrowing money from the RBI's credit line for lending purposes, have to charge a rate mandated by RBI.
Proposal 7: Sell small under performing public sector banks, possibly to another bank or to a strategic investor, to gain experience with the process and gauge outcomes.
--Disinvestment has been an ongoing theme with the present government as it was with the previous. However, under performing PSUs have not met attractive stock valuations and this would be a concern. The merger of these under performing PSU banks with some of the larger PSU banks could potentially give the government a better chance at getting attractive valuations in public offerings of these PSU banks. The merger could be in the form of a majority / controlling stock holding by a larger PSU bank.
Proposal 8: Create stronger boards for large public sector banks, with more power to outside shareholders (including possibly a private sector strategic investor), devolving the power to appoint and compensate top executives to the board.
--Considering that these boards are majority governed by the members of the public services (such as IAS), this would be very contentious proposal. Whilst the board has to be share holder appointed, the public sector companies in India are unique in the sense that they are built by and run by the government and not private enterprise. Hence the implementation of this proposal could face significant opposition from the stakeholders.
Proposal 9: After starting the process of strengthening boards, delink the banks from additional government oversight, including by the Central Vigilance Commission and Parliament, with the justification that with government-controlled boards governing the banks, a second layer of oversight is not needed.
--This would lead to a full fledged privatization of the PSU banks and would not confer any benefits to the PSU banks on the face of it. At present, government is able to infuse large amounts of cash into these PSU banks for priority sector lending and this option would not be available once the banks are fully privatized. These cash infusions are announced during the annual budget speeches.
Proposal 10: Be more liberal in allowing takeovers and mergers, including by domestically incorporated subsidiaries of foreign banks.
--Foreign ownership in the banking sector has been limited to 49% as per the latest budget speech. The overall trend here is in the direction of more liberalization of policy. Full liberalization of FDI regime might take significant more time going by present trends.
Proposal 6: Liberalize the interest rate that institutions can charge, ensuring credit reaches the poor, but require (i) full transparency on the actual effective annualized interest cost of a loan to the borrower, (ii) periodic public disclosure of maximum and average interest rates charged by the lender to the priority sector, (iii) only loans that stay within a margin of local estimated costs of
lending to the poor be eligible for PSLCs.
"The Committee believes that through a combination of transparency, incentives, and eventually competition, liberalized interest rates to the poor can be kept within reasonable limits, and liberalization would enhance, and improve the sources of, credit to the poor."
--I think this has been pretty much incorporated into the system barring the clause that banks borrowing money from the RBI's credit line for lending purposes, have to charge a rate mandated by RBI.
Proposal 7: Sell small under performing public sector banks, possibly to another bank or to a strategic investor, to gain experience with the process and gauge outcomes.
--Disinvestment has been an ongoing theme with the present government as it was with the previous. However, under performing PSUs have not met attractive stock valuations and this would be a concern. The merger of these under performing PSU banks with some of the larger PSU banks could potentially give the government a better chance at getting attractive valuations in public offerings of these PSU banks. The merger could be in the form of a majority / controlling stock holding by a larger PSU bank.
Proposal 8: Create stronger boards for large public sector banks, with more power to outside shareholders (including possibly a private sector strategic investor), devolving the power to appoint and compensate top executives to the board.
--Considering that these boards are majority governed by the members of the public services (such as IAS), this would be very contentious proposal. Whilst the board has to be share holder appointed, the public sector companies in India are unique in the sense that they are built by and run by the government and not private enterprise. Hence the implementation of this proposal could face significant opposition from the stakeholders.
Proposal 9: After starting the process of strengthening boards, delink the banks from additional government oversight, including by the Central Vigilance Commission and Parliament, with the justification that with government-controlled boards governing the banks, a second layer of oversight is not needed.
--This would lead to a full fledged privatization of the PSU banks and would not confer any benefits to the PSU banks on the face of it. At present, government is able to infuse large amounts of cash into these PSU banks for priority sector lending and this option would not be available once the banks are fully privatized. These cash infusions are announced during the annual budget speeches.
Proposal 10: Be more liberal in allowing takeovers and mergers, including by domestically incorporated subsidiaries of foreign banks.
--Foreign ownership in the banking sector has been limited to 49% as per the latest budget speech. The overall trend here is in the direction of more liberalization of policy. Full liberalization of FDI regime might take significant more time going by present trends.
Right time for a hundred small steps?
"100 Small Steps" is the title of the report prepared by the present RBI Governor Raghuram Rajan in 2008 when he was working with the Planning Commission of India. Link to the report: 100 Small Steps
The report highlights 100 changes that could be made to the present economic system in India to make it more competitive. These changes have been broken down into various categories such as macro economy, leveling the playing field, creating more efficient and liquid markets, creating a growth friendly regulatory environment, creating robust infrastructure for credit and broadening access to finance.
As this article from NDTV highlights, the recommendations from this report were far from being implemented up to 2013 Report on the progress on implementation of the Planning Commission report "100 Small Steps"
The businesses are looking for opportunity and the country that can seize this moment and capitalize on the opportunity, will get the next decade of growth and investments coming its way.
In light of this, I think this is the right time for the implementation of the 100 small steps highlighted by Raghuram Rajan in this Planning Commission report A HUNDRED SMALL STEPS and shatter the fetters of the Indian economy that has been holding us back for so long.
I will be discussing this report and various points highlighted in this report in my upcoming blog posts.
Proposal 1: The RBI should formally have a single objective, to stay close to a low inflation number, or within a range, in the medium term, and move steadily to a single instrument, the short-term interest rate (and reverse repo) to achieve it.
--On this proposal, I would say that growth should be a concern of the RBI and not just inflation. In a country such as India, where a bulk of oil, coal and gas are imported, there are significant chances of hyperinflation (cost of goods rising due to weak Rupee and expensive imports) and hyper inflation does not reflect upon true growth of the economy.
Proposal 2: Steadily open up investment in the rupee corporate and government bond markets to foreign investors after a clear monetary policy framework is in place.
--On this front, Indian businesses are now allowed to borrow in Rupees under the External Commercial Borrowing route, but we don't have a domestic corporate bond market open to foreign investors as has been suggested here. That would attract significant capital into the country since a large majority of Indian corporation have very sound credit ratings.
Proposal 3: Allow more entry to private well-governed deposit-taking small finance banks offsetting their higher risk from being geographically focused by requiring higher capital adequacy norms, a strict prohibition on related party transactions, and lower allowable concentration norms (loans as a share of capital that can be made to one party).
--I think this has been implemented in a large part with increasing number of new bank licenses being given out.
Proposal 4: Liberalize the banking correspondent regulation so that a wide range of local agents can serve to extend financial services. Use technology both to reduce costs and to limit fraud and misrepresentation.
--This is where Information Technology could play a significant role where secure Information Systems services and infrastructure could go a long way in improving the accessibility to banking services.
Proposal 5: Offer priority sector loan certificates (PSLC) to all entities that lend to eligible categories in the priority sector. Allow banks that undershoot their priority sector obligations to buy the PSLC and submit it towards fulfilment of their target.
--This would lead to more inclusive growth I think.
I will highlight more aspects of this report in my upcoming blog posts.
Next blog post in this series: A Hundred Small Steps: Part 2
The report highlights 100 changes that could be made to the present economic system in India to make it more competitive. These changes have been broken down into various categories such as macro economy, leveling the playing field, creating more efficient and liquid markets, creating a growth friendly regulatory environment, creating robust infrastructure for credit and broadening access to finance.
As this article from NDTV highlights, the recommendations from this report were far from being implemented up to 2013 Report on the progress on implementation of the Planning Commission report "100 Small Steps"
The businesses are looking for opportunity and the country that can seize this moment and capitalize on the opportunity, will get the next decade of growth and investments coming its way.
In light of this, I think this is the right time for the implementation of the 100 small steps highlighted by Raghuram Rajan in this Planning Commission report A HUNDRED SMALL STEPS and shatter the fetters of the Indian economy that has been holding us back for so long.
I will be discussing this report and various points highlighted in this report in my upcoming blog posts.
Proposal 1: The RBI should formally have a single objective, to stay close to a low inflation number, or within a range, in the medium term, and move steadily to a single instrument, the short-term interest rate (and reverse repo) to achieve it.
--On this proposal, I would say that growth should be a concern of the RBI and not just inflation. In a country such as India, where a bulk of oil, coal and gas are imported, there are significant chances of hyperinflation (cost of goods rising due to weak Rupee and expensive imports) and hyper inflation does not reflect upon true growth of the economy.
Proposal 2: Steadily open up investment in the rupee corporate and government bond markets to foreign investors after a clear monetary policy framework is in place.
--On this front, Indian businesses are now allowed to borrow in Rupees under the External Commercial Borrowing route, but we don't have a domestic corporate bond market open to foreign investors as has been suggested here. That would attract significant capital into the country since a large majority of Indian corporation have very sound credit ratings.
Proposal 3: Allow more entry to private well-governed deposit-taking small finance banks offsetting their higher risk from being geographically focused by requiring higher capital adequacy norms, a strict prohibition on related party transactions, and lower allowable concentration norms (loans as a share of capital that can be made to one party).
--I think this has been implemented in a large part with increasing number of new bank licenses being given out.
Proposal 4: Liberalize the banking correspondent regulation so that a wide range of local agents can serve to extend financial services. Use technology both to reduce costs and to limit fraud and misrepresentation.
--This is where Information Technology could play a significant role where secure Information Systems services and infrastructure could go a long way in improving the accessibility to banking services.
Proposal 5: Offer priority sector loan certificates (PSLC) to all entities that lend to eligible categories in the priority sector. Allow banks that undershoot their priority sector obligations to buy the PSLC and submit it towards fulfilment of their target.
--This would lead to more inclusive growth I think.
I will highlight more aspects of this report in my upcoming blog posts.
Next blog post in this series: A Hundred Small Steps: Part 2
Subscribe to:
Posts (Atom)