A significant announcement in the budget pertaining to the financial sector is that about setting up a new apex body to strengthen and institutionalise the mechanism for maintaining financial stability. The Financial Stability and Development Council, as it will be called, will monitor macro prudential supervision of the economy, including the functioning of large conglomerates, and address inter-regulatory concerns. Earlier attempts to create such a body did not fructify for various reasons. It was felt that a “super regulator” would not preserve the autonomy of individual regulators, such as the RBI, SEBI and the IRDA. However, there has been considerable vagueness about the functions of financial regulators, as evidenced by certain recent, well publicised cases. For instance, it is not clear whether SEBI or the RBI will supervise the recently introduced interest rate futures. There is ambiguity over the popular unit-linked insurance schemes, with both SEBI and the IRDA claiming jurisdiction. Instances such as these will only increase, as financial innovation will bring in relatively complex products that combine the features of capital market instruments and banking and insurance products. As in other countries, disintermediation in the financial sector and the emergence of financial conglomerates will pose major regulatory challenges that would require a great degree of co-ordination among several regulators. The proposal to license new private banks raises many practical questions. On no account should the RBI dilute its licensing criteria. The private banks that came into being in the early 1990s have had a mixed track record and only a handful of them, promoted by the erstwhile development financial institutions, have flourished.

The decision to provide additional capital to four public sector banks and some regional rural banks is welcome. However, the government will have to think of new ways to maintain capital adequacy in some of the banks owned by it without divesting its majority equity stake. The role of the India Infrastructure Finance Company will come under scrutiny. It has not so far been the catalyst it was expected to be in stepping up the financial resources needed for infrastructure. With an additional investment in infrastructure bonds up to Rs.20,000 qualifying for tax relief, this grossly underfunded area should attract long term savings. The decision to provide banking facilities by 2012 to centres with a population above 2,000 will promote financial inclusion significantly. Around 60,000 habitations are to be covered in the process, which will involve harnessing technology as well as conceptualising and implementing new, cost-effective banking models.

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