Introduction:

The collapse of Yes Bank has told us that—following on the collapse of bank and non-bank credit, and the logjam on the IBC proceedings—the Indian economy has to face up to an urgent, drastic and far-reaching restructuring of banking and credit institutions in India. India can’t rely only on RBI to regulate the credit market. There have to be clean lines of responsibility as to who regulates which sector.

India’s policymakers must create one financial watchdog with jurisdiction over debt, equity, pension and insurance instruments. It is no longer viable to maintain walls between markets regulator Sebi, debt and banking regulator Reserve Bank of India (RBI) and insurance watchdog Irda.

Body:

Need for urgent reforms of financial markets in the country:

• The time is past when India could afford crony capitalism, inefficient socialism and corrupt private sector behaviour and judicial delays that have cost up to 2-3 percentage points of GDP growth each year over the past several years.
• Some of the recent events in Indian Economy: The collapse of Yes Bank has told us that—following on the collapse of bank and non-bank credit, and the logjam on the IBC proceedings.
• The collapse of IL&FS, from issuer of quasi-sovereign bonds to a wreck that threatens to take down other institutions, exposed the fragility of shadow banks — called non-banking finance companies (NBFCs) — regulated by RBI.
• Real estate companies such as Amrapali have been rebuked by the courts. In these matters, the victims are not other banks or companies, but individuals.
• Financial transactions costs of doing business in India must be one of the highest in the world. The government did pass the IBC, and it was expected that creditors would be able to recover their dues from borrowers.
• We have noticed that debtors have used every trick in the book to thwart the orders of the specialist court and imposed costs on the creditors. The entire effort to clean up NPA mess has been frustrated by clever debtors.
• Currently, the banking, capital markets and insurance sectors in India are regulated by multiple regulators, i.e. RBI, SEBI and IRDAI.
• The dynamic nature of business necessitates a high degree of inter-regulatory coordination. It also requires regular clarifications and frequent amendments in the existing regulations governing financial activities.
• The development of financial services and products would require focused and dedicated regulatory interventions.
• It is the ordinary tax payer—direct plus indirect tax payer—who bears the burden of the badly regulated credit market. Indian tax payers are not organised for political lobbying. The government often throws money at any problem which exposes a weakness such as farmers’ debts.
• The government (of all parties) happily throws money at each problem—farmers distress, inability to repay debt, drought or too much rainfall. It is time tax payers asked some tough questions.
• The Indian economy has become much more like a developed economy than it was even 20 years ago. The current drop in GDP growth rate is due to the uneven supply of credit at exorbitant prices. It is no longer a bullock cart where the government can use physical controls.
• India’s economy will generate prosperity only if it lets private sector play a fuller, grown-up and responsible role in the way the economy generates growth.

Way forward:

• Thus, India cannot rely on just RBI to regulate the credit market. There have to be clean lines of responsibility as to who regulates which sector.
• The judicial arm has to be made part of the reform strategy.
• A unified financial regulator in India would provide world class regulatory environment to financial market participants. This also be essential from an ease of doing business perspective.
• The unified authority would also provide the much needed impetus to further development of Indian Economy in India in-sync with the global best practices.
• India needs to set up a Commission to propose a comprehensive structure to regulate banks, non-banking lenders, insurance and stock braking.

Conclusion:

The only way to keep investors safe from corporate opacity and lack of coordination among regulators, is to leave RBI with monetary policy and macro prudential regulation and assigning oversight of all other financial conduct to another agency. A converged financial market needs a converged watchdog.