The finance minister, in her 23 July 2024 Budget speech, inter-alia, talked of the government preparing the finance sector in terms of size, capacity, skills, and regulatory framework to meet the investment needs of the country. In my previous article (TSB: 21-17 May 2023) titled “Towards a more robust financial services industry”, measures were suggested to overcome Bharat being underbanked, underinsured, and inadequately covered by old age income security measures.
NITI Aayog would like Bharat to avoid the middle-income trap, become a developed nation, and strive to be a $ 30 trillion economy by 2047 with a per capita income of $ 18,000 per annum. This needs a 20-fold increase in the financial services sector, according to a report titled “Banking for a Viksit Bharat,” by BCG in association with FICCI and IBA, which in turn requires structural shifts – growing deposits, enhancing asset quality, and improving productivity while advancing digital capabilities and future competencies. It is clear, Bharat will need transformation in its institutional architecture to meet its aspirational trajectory in finance.
RBI has proposed five policy priorities for the future of Bharat’s financial system. They include digital financial Inclusion, digital public infrastructure, consumer protection and cybersecurity, sustainable finance, and global integration and cooperation. This requires seamless governance and services on demand. Though RBI has eschewed “light touch” regulation on risk management, it has chosen to stay ahead of the regulatory curve on bank capital and has long followed a multiple indicators approach covering not just price stability but economic growth, financial stability, and financial inclusion. Going forward the tasks would include Plain language in communication to help in bridging the asymmetry of information in regulatory space; Making UPI and card network RuPay go global; Helping launch CBDC with international cooperation; Improving oversight mechanisms significantly; Promoting ‘Finternet’ (a new approach to global finance that combines the best of the regulated world with the best that tokenization technology can offer); Launch nationwide Unified Lending Interface platform to enhance lending to various sectors of the economy, especially agriculture, and MSME; Making sure, the Account aggregator convert the potential to transform the access to financial services for the next billion.
The foundation of inclusive Bharat was laid with the introduction of PMJDY in 2014, leading to financialization of savings of the bottom of pyramid. Improving access of PMJDY account holders to micro-credit, micro-investment, and micro-insurance is needed. The level of financial literacy among the PMJDY account holders needs to be strengthened further. Fintechs in the country have grown in the last decade, both in number and scale. While financial sector regulators have set up regulatory sandboxes, an inter-operable regulatory sandbox (for fintechs that operate across financial services) participation has been limited.
Strategic location-based accelerators, which are backed by central or state governments, will enhance fintech activity and hasten the success of the better among them. The Fintech Self-regulatory organization (SRO) will be instrumental in playing a developmental role for the ecosystem by setting standards on aspects of conduct, customer protection, corporate governance, technology best practices, operational resilience and cyber security. Finally, all regulated entities, including public sectors, must be led by autonomous and eminent boards.
The journey of reforming the capital markets agency architecture began with the Percy Mistry Committee in 2007, which said: “Key task in reforming regulatory architecture is to place all regulatory and supervisory functions connected with all organized financial trading into SEBI”. SEBI’s regulatory framework governing investment advisors (IAs) and research analysts (RAs) must offer proportional relationship between following the SEBI rules and the reward that the business brings. Effectively managing conflicts is essential for individuals in high positions. While the SEBI Charter offers a foundational framework, there is room for enhancement on safeguarding the integrity of the institution. Retail participation in Indian capital markets has exploded since 2020-21. Therefore, ‘Seller beware’ might be an idea whose time has come. Another important matter is to effectively regulate investment advisers. At the high table of development strategy, It is important to take all measures to develop the bond, currency and derivatives markets, including launching exchange-traded currency and interest rate futures, and developing a transparent credit derivatives market with appropriate safeguards. Allowing social stock exchanges to facilitate CSR funding of projects could catalyze change by improving outcomes. The bottom-line: Affording speed, Ease of Doing Business including reduced costs of compliance, scale, flatter regulatory architecture for developing specialism and ownerships to the market players, and insisting on inclusion as a dharma.
There are humongous challenges facing Indian insurance penetration, which is way below the global average of 7%. Hence, the regulatory call: ‘Insurance for All by 2047’. But this is troublesome for, insurance is not a social science. As insurance has a global character based on spread of risks, the regulator must adopt global best governance standards. The demand gaps, involving lower strata, would be filled in by the government. The ‘Ease of Doing Insurance Business’ (EoDIB) must be the biggest tool requiring Single-Window-Ownership from the Insurance Regulators providing solution-led supply-chains. The Self-regulatory organizations (SROs) for Insurers / Reinsurers / Intermediaries / Insurtech / Surveyors / Insurance Information Bureau must be the next tool to let these bodies regulate themselves (i.e. taking over “standards of conduct” functions from the regulator). The next tool must involve the regulators pursue ‘market oversight’ granularly, for all units including PSUs, for ensuring sustainable profitable growth where R&D could play a circulatory role from profits to risk mitigation, and vice versa. It is critical that the IRDAI, with the active support of the Government and International Financial Services Centre Authority (IFSCA), leads Bharat to become a Global insurance Centre at Mumbai, and a Global Reinsurance Hub at IFSC GIFT City. This will be in line with the ‘Hub and Spoke’ architecture where ‘Insurance Clusters’ churn out capacities and specialisms that lead to ‘spread’ (‘penetration’), as a consequence.
Overall, the 21st century financial services must have a transforming Policy Framework through principle-based primary legislations, and empowered regulatory setups that supervises through principle-based regulations, in line with our dharmic governance processes. The Financial Sector Legislative Reforms Commission (FSLRC) has suggested a draft Indian Financial Code (IFC) to replace the bulk of the existing financial laws. The draft Code seeks to move away from the current sector-wise regulation to a system where the RBI regulates the banking and payments system, and is relieved of its public debt management role. A Unified Financial Agency subsumes existing regulators to regulate the rest of the financial markets. The single parliamentary law will also ensure financial propriety whilst dealing with regulatory fee collections, as well as designing the laws to take the regulatory appointments to take them to high levels of state capability. Differential focuses on ‘prudential’ and ‘conduct’ regulatory requirements are equally important. What is needed is to work on the IFC to update it before finally enacting it, ensuring that the individual sectoral streams are provided both autonomy and integrity.
Whilst future-readying the financial services sector, Dr. V. Anantha Nageswaran, CEA, has set higher benchmarks: ‘Financialization, in the developed economies, has led to unprecedented levels of debt, dependency on rising asset prices for growth, and increased inequality.
Bharat must, therefore, avoid these pitfalls, and keep the right balance between national imperatives and investor interests or preferences. It also means becoming a global agenda-setter rather than an agenda-taker. The financial sector must assume higher responsibility because the impact of what happens in the financial sector reverberates throughout the economy’.
Arun Agarwal is an author, columnist, teacher and ex-CEO. He is currently a Professor of Practice at Rizvi Institute of Management Studies and Research, Mumbai.