Pitching for a non-restrictive regulation in the financial sector, Prime Minister’s key economic advisor C. Rangarajan on Monday said too many norms can impede financial innovations.

“Too little regulation may encourage financial instability, but too much of it can impede financial innovations which are badly needed,” he said at the Annual Banking Summit organised by ASSOCHAM in New Delhi.

Dr. Rangarajan is the Chairman of the Prime Minister’s Economic Advisory Council (PMEAC).

Financial innovation and regulations, he said, must go hand-in-hand in order to ensure growth with stability in real and financial sector.

“Regulatory oversight or innovations is necessary. But the regulatory perspective on innovation must not become too restrictive. The policymakers must strike an appropriate balance between the need for financial innovations to sustain growth and the need for regulation to ensure stability,” he said.

The regulatory umbrella should be such that it should promote a competitive banking system that will deliver efficient services at minimal cost, Dr. Rangarajan added.

Emphasising that scope for financial innovation remains wide in India, he said there is need to draw appropriate lessons from the current international financial crisis.

On infrastructure financing, the PMEAC Chairman said there is a need to explore innovative ways for financing the sector. Banks at present have certain limitations.

“They (banks) have to take care of mismatch in liability and asset management. Of course a vibrant debt market will also help investors’ need for long-term funding,” he said.

On entry of new banks, he said, “our decision on how many new banks to be licenced must be based on what the economy will need not today but over the next several decades“.

The entry norms could be stringent and only well qualified entities should be encouraged in order to improve the quality of banking system and promote competition, he said.

On economy, Dr. Rangarajan said India needs to overcome the slow phase of growth and move to high growth path.

He suggested removing supply side bottlenecks in key infrastructure sector, including coal and iron ore, to get back to 9 per cent growth rate.

Noting that the coming decade would be crucial for India, he said “if India grows at 8-9 per cent per annum, it is estimated that the per capita GDP will increase from the current level of $1,600 to $8000-10000 by 2025”.

India would then transit from being a low income to a middle income country, he said adding, for this to happen, the banking sector must develop so as to meet the needs of this diversifying economy and assist the transition.

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