Ashvin Parekh, National Leader-Global Financial Services, Ernst & Young, sees financial inclusion as what will engage the minds of the policymakers in 2010 more than anything else in the banking sector.
“We would see more geography expansion of our banking sector. Hopefully we could see our banking system expanding in the global markets as well,” he envisages, while interacting with Business Line a few days ago.
Excerpts from the quick email interview.
At the start of the century, or even mid-decade, what were the policy expectations to be fulfilled by the end of the first decade?
In the financial services sector there were substantial expectations. Large reforms were on the anvil. The banking system was looking for huge reforms in the areas of the introduction of robust risk management systems, and also to play a substantial role in leading capital into the economy.
In the insurance sector there were going to be far-reaching reforms. The opening up of the sector to the private investors had happened just around the turn of the century. The life insurance industry was crying for more penetration and creating channels for infrastructure funding.
Pension was another area where substantial reforms were expected. We wanted to move from the defined benefits to an environment of defined contribution. In addition, we were expecting reforms in the old age security system for almost 90 per cent of the working population which is in the unorganised sector to be embraced by the new system.
In the capital markets, substantial expectations were there in the areas of the introduction of new instruments in addition to the traditional equity and debt instruments.
Also there were expectations of reforms in the corporate bond markets as well as in the retailing of debt instruments. In the asset management sector, as well, there was a need for an effective governance environment; and reforms around disclosures and transparency were required.
Overall, the financial sector had to be reformed to fund the growth of the economy to the levels above 7 per cent to 8 per cent which was witnessed in the earlier decade.
Also there were serious gaps in the areas of governance and investor protection.
At the close of 2009, where are we?
We do have a mixed bag of performance. A good five years during this decade during which time we had the coalition government which was supported by the Left parties was almost used up or wasted as no reforms could be carried out.
Everything ranging from divestment to foreign investment was viewed by the policymakers in a different colour and with a different context. This period perhaps was the darkest era in the history of the sector from the point of view of the reforms.
In the banking sector, reforms around non-performing loans, capital management and financial soundness are the brighter part of the story. The banking sector grew at a good 24 per cent - 25 per cent on an annualised basis.
Also, during the global financial crises, the Indian banking sector stood up to all the challenges and emerges as one of the best performers compared to several economies in the world. The banking regulator deserves a high order of praise and recognition that it received from the other economies and the multilateral agencies.
However, in the areas of reforms and development there hasn’t been any significant change worth noting. Also a substantial non-inclusion of the order of 69 per cent - 70 per cent highlights the failure of the sector to reach out and embrace the deserving part of the population.
In the insurance sector also we have had a mixed bag of performance when compared with the expectations. The life insurance sector grew at a good rate, however, it has not been able to develop a market for protection products. Instead, it has been competing with the asset management/ mutual fund industry.
The general insurance sector saw a major reform in the detariffing area. At the beginning of this reform, calibrated approach was taken. Both the industry and the regulator gave an impression that they were in control of the situation. Not any longer, as we are witnessing an intense price war which seems to have gone completely out of hand.
It is difficult to judge whether the four public sector general insurance companies are engaging in this price war or actually leading it. The outcome however can be easily judged.
In the pension area, in the mandatory pension reforms we seem to have done well. This was in any case a low-hanging fruit. The performance of the new pension system for the unorganised sector has been a major disappointment as yet.
Overall, we ended up the decade with below-average performance in the policy reform areas as compared to our expectations. However, due recognition should be given to the regulators in the sectors for the stability.
For 2010, what should be the agenda?
Perhaps financial inclusion will engage the minds of the policymakers more than anything else in the banking sector. We would see more geography expansion of our banking sector. Hopefully, we could see our banking system expanding in the global markets as well.
In the insurance sector we should see the life companies focusing more on the long maturity and protection products to be able to meet with the infrastructure fund requirements.
The finance sector should also manufacture financial assets to meet with the investment requirements of the life and the pension companies. We should see an expansion of more channels. Likewise in the general insurance industry we should see penetration of higher order of risk-based pricing as well as risk-based capital management.
There is a need to take a fresh look at the old age security system for the unorganised sector. We need more financial instruments both for the institutional investors as well as retail.
Also, we should see a higher order of capital conversion. If the financial assets continue to return higher than their counterparts in other markets, then we should see a higher order of foreign capital flows.
Overall, if the Government and the regulator work with a good balance of growth and stability, we will have a fascinating decade ahead of us.
**
InterviewsInsights.blogspot.com
