Financial Regulations

Introduction
• Indian financial structure is diversified.

• Comprises of- commercial banks, insurance companies, non financial banking

companies, cooperatives, pension fund, mutual funds and small other entities.

• Dominated by-banks and insurance

• Regulators of the current financial system-

• The Reserve Bank of India (RBI)

• Securities and Exchange Board of India (SEBI)

• Insurance Regulatory and Development Authority (IRDA)

• The Pension Funds Regulatory and Development Authority (PFRDA)

 Salient Features of the
Regulations
• Reserve Bank of India (RBI) -Fixed deposits and other banking products

• Government of India (GoI) -Small savings products

• Securities and Exchange Board of India (SEBI) -Mutual funds and equity markets

• Insurance Regulatory Development Authority of India (IRDA) -Insurance

• The Pension Fund Regulatory and Development Authority (PFRDA) - The New Pension
Scheme (NPS)

• Mandate of all regulators-

• Protect the interests of customers

• Each regulator have their own rules

 RBI
• Central Bank -setup in 1935 in Calcutta, under special act

• Nationalized in1949, has 19 regional offices and sub offices

• Owned by the Government

• Functions of RBI

• Main authority for monetary policy

• Maintain Financial stability

• Maintains liquidity

• Issuer of currency notes

• Controls other commercial banks

 Monetary Policy
• Control the supply of money

• Open Market operations-

• RBI buys and sells securities in the open market to

increase or decrease the supply of money

• Bank Rate- A rate at which RBI lends money to

commercial banks without a collateral

• It is a rate at which RBI discounts bills

 Monetary Policy
•Control the supply of money

•Variable Reserve Requirement - CRR & SLR

•Liquidity Adjustment Facility (LAF)

•Moral Suasion

•Monitor key indicators like GDP and inflation

• GDP is negatively related to inflation

 Insurance Regulatory and Development Authority of India (IRDAI)

• IRDAI is an autonomous apex statutory body for regulating and developing the insurance
industry in India. It was established in 1999 through an act passed by the Indian Parliament.

• The headquarters of (IRDA) of India is located in Hyderabad.

• Function-

• To regulate the insurance industry of the country.

• Ensure growth and development of the insurance sector.

• Protection of the policyholders-

• Assign an policy

• Nomination

• Insurable interest

• Settlement claims

• Many years the insurance sector of India was protected.

• Registration mandatory for companies

 Securities Exchange Board
of India
• Regulatory body of the Government of India

• It controls the securities market.

• Established on April 12, 1992 under the SEBI Act, 1992.

• Headquartered at the Bandra Kurla Complex in Mumbai, India

• Functions

• protection of investors

• platform to promote, develop and regulate the securities market in India

• Redressal Forum
Pension Fund Regulatory and Development Authority (PFRDA)

• Established in October 2003 by the Government of India,

• Became fully autonomous and functions independently from FY 2014-15.

• Function-

• Develops and regulates the pension sector in India

• Introduced -NPS

• Contributions are collected and accumulated in an individual pension account using various
intermediaries

• Intermediaries for the purpose of collection, management, record keeping and distribution of
accumulations.

• Registration mandatory

• Digitalized services offered

 Multiple Regulators is it a
problem?
Yes to a certain extent.
Varying regulatory requirements which often leads to regulatory arbitrage
• Less of capital and administrative burden

The existing framework also contains overlaps between laws and agencies

India has over 60 Acts and multiple rules / regulations that govern the financial sector

Along with financial globalization, complexities of financial regulation have also increased.

Greater co-ordination has also become imperative in the context of concerns on financial
stability globally

For higher growth - developing countries have to take measures for reforming their financial
system.
 Financial sector Reforms in India

• In 1969 and 1980 -Nationalization of large banks

• Early 1990s -Restricted to the function of channeling resources from the surplus to deficit sectors

• Improved the allocative efficiency of resources and accelerated the growth process of the real sector by removing
structural deficiencies affecting the performance of financial institutions and financial markets

• In the banking sector -The restrictions on activities undertaken by the existing institutions were gradually relaxed
and barriers to entry in the banking sector were removed.

• Non-banking financial intermediaries -reforms focused on removing sector-specific deficiencies

• Insurance sector and mutual funds- attempted to create a competitive environment by allowing private sector
participation

• Financial markets -removal of structural bottlenecks, introduction of new players/instruments, free pricing of
financial assets, relaxation of quantitative restrictions improvement in trading, clearing and settlement practices,
more transparency

• Commercial banking sector-emphasis on structural measures and improvement in standards of disclosure and
 Advantages of Reforms

Private sector credit expanded rapidly in the past five decades thereby supporting the growth momentum

Financial innovations have influenced velocity circulation of money by both reducing the transaction
costs and enhancing the liquidity of financial assets.

Market capitalization-to-GDP ratio increased very sharply in the past two decades implying for a vibrant
capital market in India.

The results of these reforms have been encouraging and the country now was one of the most vibrant
and transparent capital markets in terms of market efficiency, transparency, and price discovery process

Though they had progressed, it is not sufficient

 Reforms Required in spite

of Growth
• Financial sector reforms need to keep progressing with continued improvements in regulation,
supervision and stability areas in order to avoid build up of new vulnerabilities

• Well-developed corporate bond market was required -

1. to supplement banking credit and the equity market

2. to facilitate the long- term funding requirement of corporate sector as well as infrastructure
development in the country

• A structural shift from a bank-dominated financial system to a more diverse financial system was
required

• Pension Reforms would facilitate long term savings

• Insurance an effective means of channelizing savings to investments.

• The unorganized sector and people working therein need to introduced to formal sources
The financial sector legislative reforms Commission (FSLRC)

FSLRC is a body set up by the Government of India, Ministry of Finance, on 24 March 2011, to review and rewrite
the legal-institutional architecture of the Indian financial sector.

Most important of the recommended changes by FSLRC -

• The decision to merge the roles of the Securities and Exchange Board of India, the Forward Markets
Commission, Insurance Regulatory and Development Authority, and Pension Fund Regulatory and Development
Authority into a single regulator called the “Unified Financial Agency” (UFA),

• Reserve Bank of India (RBI),-To regulate banking and the payments system,

• Financial Stability Development Council (FSDC) -To monitor and address systemic risk, which is to be led by the
finance ministry.

• Creation of a Resolution Corporation -To identify institutions that are threatened by insolvency and resolve the
problem at an early stage

• Creation of a Public Debt Management Agency -To take the responsibility of public debt Management away from
the RBI.

 Global Financial Crisis

• (GFC) refers to the period of extreme stress in global financial markets and
banking systems

• Between mid 2007 and early 2009

• During the GFC, a downturn in the US housing market that spread from the
United States to the rest of the world

• Many banks around the world incurred large losses

• Deepest recessions
 Causes of GFC
• Excessive risk-taking in a favorable macroeconomic environment

• Economic conditions in the United States and other countries were favourable

• In this environment, house prices grew strongly

• Borrow imprudently to purchase and build houses

• A similar expectation in European countries

• A large share of such risky borrowing

• Competition increased among lenders

• Did not closely assess borrowers’ abilities

• Mortgage-backed securities’ (MBS),

• Increased borrowing by banks and investors

• Borrowed increasing amounts

• Regulation and policy errors

• Insufficient regulation

How the GFC Unfolded

• US house prices fell, borrowers missed repayments

• Borrowers that failed to make their loan repayments began to rise.

• Loan repayments were particularly sensitive to house prices

• Stresses in the financial system

• Lenders and investors began to incur large losses

• Investors became less willing to purchase MBS products

• Spillovers to other countries

• Interconnections provided a channel for the problems

• Failure of financial firms, panic in financial markets

• Investors began pulling their money out of banks and investment funds around the world

• Financial markets became dysfunctional

• Economies fell into their deepest recessions

 Policy Responses

• Lower interest rates

• Central banks lowered interest rates

• Purchased a substantial amount of financial securities

• Increased government spending

• Guaranteed deposits and bank bonds

• Stimulate demand and support employment

• The policy response prevented a global depression

• Stronger oversight of financial firms

• New global regulations

• Regulators are also more vigilant

Transmission to Indian banking sector

• Limited direct transmission

• Factors insulated the banking sector

• Stringent regulation and consequent limited integration with the global financial system

• Banks are not permitted to borrow outside of the country for lending purposes

• The presence of foreign banks low

• Not much exposure to sophisticated investment products

Bulwark against a crisis in the banking sector

• Precautionary norms of the Reserve Bank of India

• Pervasive use of ‘black money’ in the economy

Despite an unprecedented global recession, India remained the second fastest growing economy in the world
THANK YOU

Dr. Medha Shetye