COMPETITION & REGULATION REFORMS IN INDIAN FINANCIAL SECTOR Amol Kulkarni CUTS International

Background 2  India Competition and Regulation Report  National reference group  Secondary research  Expert comments  Perception surveys – perception index

Outline 3 BankingRBI NBFCsRBI, SEBI InsuranceIRDA Regulation, Competition, and Consumer Protection Learnings from financial crisis Issues for discussion and way forward

Getting started 4

Entry and performance conditions 5  Minimum capital and reserve requirements  Prudential norms - capital adequacy and market discipline  Income recognition, asset classification and provisioning  Fit and proper test for directors Goodhart Committee (2012), “Risk management concerns of individual banks are quite different from those of regulators. It should not be for the government/ regulators, to try to determine how much risk market participants take on board, nor to set out the particular way that they assess such risks.”

Regulatory discretion 6  Impose additional conditions  Reject application - eg. NBFCs “licence may be issued subject of such conditions as the [regulator] may think fit to impose.” “any other condition, the fulfilment of which would, in the opinion of the [regulator], be necessary to ensure the carrying on of business” “that the public interest shall be served by the grant of certificate of registration”

Inadequate grievance redressal 7  No judicial or quasi-judicial appellate body  Appeal to Central Government within 30 days  Writ courts don’t get into merits

Managing competition 8

Preference to public sector 9  Exclusion of general corporate laws  Winding up provisions  Explicit and implicit privileges  LIC - government guarantee  Implicit deposit guarantee - 80% ICRR respondents believed government won’t let public sector entities fail  Access to public funds - Rs. 14,000 cr. in  High NPAs (3.84% v. 1.91%)  Low ROA (0.78% v. 1.63%)

Differential regulation of NBFCs 10  Lighter regulation for NBFCs  Relaxed prudential norms and less approvals  46% ICRR respondents believed creates uneven playing field  RBI working group on NBFCs (2011)  No benefits under SARFAESI Act  Inadequate tax benefits (TDS and indirect tax) - MoF Report “Recent experiences show that such shadow banking entities can pose potential threats to long – term financial stability if their transactions connect to banks, the banking system, or asset markets” EU Banking Sector Expert Group (2012)

Regulatory co-ordination 11  Amongst financial regulators  Bancassurance guidelines  Linked insurance products  Securities Laws (Amendment) Ordinance, 2013  With Competition Commission of India  Proposed amendment on mandatory consultation  Banking Laws (Amendment) Act, 2012  For systemic regulation  Role of Financial Stability and Development Council

Systemic regulation 12

Dealing with consumers 13

Unfair business practices 14  Product bundling  49% ICRR respondents perceived it to be unfavourable practice  Misselling  Inappropriate product  Unreasonable charges  Fraudulent entities Kay Review (2012), identified short-termism as principal problem.

Unsatisfactory implementation 15  Non-availability of comparison  Complex KYC requirements  Prohibitory for excluded class  Duplicity and cumbersome  Ineffective Ombudsman “One of the outcomes of financial crisis in severely affected economies was realisation of loss of trust born of profound lapses in banking standards… retail and business customers alike are often denied sufficient choice or access to enough information to exercise effective judgment.” Parliamentary Commission on Banking Standards, UK (2013)

Learning from crisis? 16

Developments at home 17  Bank Licensing Guidelines (February 2013) “it may not be possible for RBI to issue licenses to all the applicants meeting the eligibility criteria ”  RBI Discussion Paper on Banking Structure (August 2013) “it is important that the entry norms should be stringent so as to encourage entry by only well-qualified entities in order to improve the quality of the banking system”  RBI Scheme for WOS by foreign banks (November 2013)  Reciprocity, single mode of presence, and near national presence

Developments abroad 18  Twin peak model  Dodd-Frank Act  Make banking boring  Simple financial products and suitability requirements “The regulators must only focus on maintaining competition, managing information asymmetry, and systemic concerns”, Geneva reports (2009)

Issues for discussion 19

Issues for discussion 20  Need for reforms?  What kind of reforms?  Taking in account expanding needs of Indian economy  Global financial sector – back to the basics  Are we going in circles? Is this the law of nature?

Demands of ICRR respondents 21

22 THANK YOU