EDITORIAL
SPECIAL FEATURE: An Interview with Mr. Gajendra Kothari, MD and CEO, Etica Wealth Management
Infrastructure Financing By Mr. Vishal Bhambhani, Alumni SIMSREE
Banking Licenses for the NBFCs: A Necessary Evil? By Hitesh Rohira, SIMSREE
Financial Sector Legislative Reforms Commission By SIMSREE FINANCE FORUM
With the passing of Banking Laws (Amendment) Bill, the RBI has got the power to issue new banking licenses in order to encourage financial inclusion as well as allow for more penetration of banking services to the public. This move is seen as a game changer in the banking sector with India’s largest business houses as well as NBFCs set to apply for new licenses. But, along with this development comes a greater responsibility for RBI to check the credibility and usage of funds by license nominees in order to regulate the function of new banks so that they do not deploy funds to risky assets or for personal business interests. Another important topic covered in this issue is ‘Infrastructure Financing’. Infrastructure creation is seen as one of the main growth drivers in times of slump in growth and financing is the way with the help of which we can create better infrastructure and hence contribute better for the prosperity of our developing economy. In this issue, we have an article on “Infrastructure Financing” by Mr. Vishal Bhambhani, who is an Associate at Infrastructure Solutions Group at Centrum Capital Ltd. and our illustrious alumni. Also, as part of our forum activity we have an article on “Banking Licenses for NBFCs: A necessary evil?” written by Hitesh Rohira from SIMSREE. Finally we have an article from our team on Financial Sector Legislative Reforms Commission(FSLRC). Happy Reading!
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Interview: Mr. Gajendra Kothari, CEO and MD, Etica Wealth Management
1. What are the general roles of wealth
manager for any queries regarding the
management industry and what is your
investments that people have to make. But
take on the current wealth management
now with the advent of technology and
industry?
rapid growth in the economy and with the increase in the income levels of the people
Ans. Wealth management industry is a tiny
,banks now have multiple desks in their
industry currently in India. It has not
branches for the different types of savings
expanded to the scale to which it has grown
account they need to have. Agents are also
in the developed markets. People generally
responsible for the spreading awareness
have small savings with them and they like
amongst the people regarding their savings
to invest in gold. People also invest in real
and investments. Industry in recent times
estate properties but that is limited to a
has become a lot more complex and
very small percentage of people .Wealth
dynamic. Previously one was able to
management awareness exists amongst
guarantee a fixed percentage of return on
such small percentage of people. People
the investments made but no more is the
also use LIC schemes for tax savings but
same scenario. One cannot guarantee a
people think that they are a kind of forced
fixed percentage of return .Indian industry
savings as they view LIC policies as a source to
save
their
tax.
Gradually
is a sunrise industry with a tremendous
after
potential for growth to tap large untapped
liberalization, foreign banks have entered
markets.
India bringing in their best practices. Public Sector Banks (PSB) initially used to have only a single point of contact like the
3
2. What is your take on the Financial
people
awareness amongst the people in the tier2
investments.
and lower tier cities and how do you think
fledged advisors rather than just Life
cities and around 30-35 % people are
insurance agents as it will help to spread
financially literate in metros like Mumbai,
the financial awareness more quickly and
so a lot more needs to be done in order to
easily and also broaden their thinking .RBI is
increase awareness amongst the people.
also using retired bankers and teachers to
Even in a metro like Mumbai which is the
spread financial awareness which is a very
financial hub of India, a lot more potential is growth
of
and
Ans. The agents can be thought to be a full
financially literate in the tier2 and lower tier
the
savings
about financial planning?
Ans. Only around 10 % people are
for
their
3. Can agents be used to spread awareness
financial awareness could be spread?
there
regarding
good initiative.
wealth
management industry because of the lack
4. What is the time horizon for investing in
of financial literacy amongst the people.
mutual funds?
The other difference between the people in
Ans. First of all a mutual fund should not be
the metros and the smaller cities is that the
bought randomly just for the sake of
people in the metro don’t have time which
making quick money. Some basic things
they can spend to make themselves learn
which they need to keep in mind before
the basics of financial investment while the
investing is that they need to know for what
people in the smaller towns and cities do
they are investing, how much money they
get time to learn these basics more thing
are investing, what is their financial goal for
that can be done is to teach normal
which they are investing, what is the time
economic terms in an engaging manner in
period over which they would like to get the
the schools to spread awareness amongst
desired return. They need to keep in mind the financial goal they have and the not
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kind of returns that they will get in short
illiquid asset which doesn’t pump in the
term.
money into the economy.
5. How to woo investors to save money in
8. What is your take on the Rajiv Gandhi
Mutual Funds?
mutual Fund scheme?
Ans. One can show them a comparative
Ans. It is a good initiative but gain too many
analysis about the performance of various
complexities will hamper the scheme. It is a
mutual fund providers and the rate of
separate scheme
return that they get over a period. They
additional 50000 rupees apart from 1 lakh
need be taught that if one puts money in
rupees under
saving schemes and if inflation is more than
drawback is that only new investors are
savings rate then there is no point in
allowed who haven’t yet opened any demat
putting money in savings scheme.
account so the scope of existing investors
where one can save
80C.But again the major
investing is closed down.
6. Why don’t people invest in real estate?
9. Why are the ETF schemes not working?
Ans. The main reason is the huge sum of money required to but a property which
Ans. They are very specialized schemes.
majority of the people can’t afford.
People in general aren’t aware of the plain vanilla products being offered so the scope
7. How to bring money into the equity
of
market rather than gold?
development
of
ETF
schemes
automatically reduces .Majority of the
Ans. To create a separate vehicle for
people do not have demat accounts which
equities because if money flows into equity
is pre-requisite for ETFs.Unlike ETfs gold
then it is the main source of financing for
and FDs are very easy to understand
many industries which plays a part in the
products
development of an economy .People can be
understand and invest in.
wooed by providing tax benefits on the money they put into equities .Gold is an
5
which
even
a
layman
can
10. What is your take on budget w.r.t. investments?
FIN-QUIZ
Ans. No changes as such have been made in
1. A US denominated bond that is publicly issued in US
this budget to make the investments lucrative.
2. Foreign exchange contracts which provide for settlement on the 1st working day after the contract day
“One more important thing that people need to remember is that Insurance and savings should be considered two separate things because Insurance should be taken solely by perspective of insuring one’s life so that the family also gets financially covered “
3. In what denominations can a commercial paper be issued in India 4. Which sister organization of the World Bank helps private activity in developing countries by financing projects with long-term capital in the form of equity and loans? 5. New industries that are coming up and which are going to play an important role in the country’s economy December Issue Answers: 1. Luca Pacioli 2. "Big Board" or "The Exchange" 3. zero 4. Economy 5. Tarini Vaidya of KBC Bank India & South Asia 6
Infrastructure Financing - India -
By Mr. Vishal Bhambhani, Alumni
Infrastructure – an asset class comprises of:
Power
generation,
transmission
As
Development
of
Roads,
bridges,
class,
Building infrastructure is a capital-
intensive process, with large initial costs
Airport and seaport development
Railway
tracks,
signaling
and low operating costs.
system,
It requires long term finance as the
gestation period is often much longer than
stations
say a manufacturing plant
Telephone lines, telecommunications
network
asset
Basic Characteristics:
runways
investment
“infrastructure” has the following:
&
distribution
an
These projects are characterized by
non-recourse or limited-recourse financing;
Pipelines for water, crude oil, slurry,
i.e. lenders can only be repaid from the
waterways
revenues generated from the project
Canal networks for irrigation, sanitation
or sewerage
Market and commercial risks related to
uncertainty of demand (traffic) forecasts are of greater importance
Out of the above, power, roads, seaports & airports form a major chunk of required
/envisaged investment (public and private)
nature of most projects and interface with
w.r.t physical infrastructure development.
regulators and Govt. agencies
7
Have unique risks of public interest
Developer/Promoter’s
In some cases, projects have significant
(Shareholders): To maximize ROE and
externalities wherein the social returns
minimize the payback period of the equity
exceed the private returns – which in
investment.
turn calls for some form of subsidization like
perspective
Lender’s
Viability Gap Funding, Govt. guarantees,
perspective:
Financial
viable
project with scheduled repayment(s) of
grants, etc
loan and visibility of future cash flows with
Funding of an infrastructure project takes
maximum certainty
place with an objective of:
Authority’s
perspective:
“Financing a single purpose capital asset
implementation
of
within
maximum utility to the users of the
a
Legally
independent
project
company (SPV) usually with a limited life”
the
Timely
project
with
infrastructure at minimum cost to the exchequer.
Structure of Infra – financing:(Diagram on next page)
Purchaser/Customer’s
perspective:
Availability of better quality infrastructure
Project Financing is an option granted by
at affordable cost.
the financier- exercisable when an entity demonstrates that it can generate cash
The satisfactory combination of the above 4
flows in accordance with long term
stakeholders
forecasts. The assets, rights and interests of
practically unattainable solution but has to
the development are usually structured into
be dealt with in a non-orthodox way by
a special – purpose vehicle (SPV) and are
safeguarding each stakeholder’s interests –
legally
secured
collateral.
A
to
the
typical
leads
to
a
somewhat
financiers
as
which calls for usage of innovative financial
example
of
products or in simple terms – Financial
arrangements made by a SPV of an
Engineering
infrastructure project is shown below:
8
Infrastructure Finance – Indian scenario:
India's over dependence on road freight means that logistic cost as a percentage of
India is among the top 3 fastest growing
GDP is as high as 13%-14% compared to
economies in the world; however, the GDP growth
is
constrained
by
lack
7%-8% in developed countries and 9%-10%
of
in other BRIC countries
infrastructure development in the country which is evident from the fact that:
India’s industries suffer from chronic power
(Source: World Economic Forum’s Global Competitiveness Index)
India ranks 91st in the world in availability of
cuts; exports are delayed because of poor
overall quality of infrastructure.
roads and congested ports. Office-goers
India's logistic cost as a percentage of
spend hours stuck in traffic; villagers get
the GDP is unusually high - double that of
electricity for only 6 to 8 hours a day.
developed
Economists estimate that ~ 2 % of GDP is
countries
and
substantially
lost owing to poor infrastructure.
higher than BRIC countries
9
Considering all of the above:
Private avenues
India’s growing economy is placing huge
demands
on
development
of
for
avenues:
projects
Funding
comprise
of
commercial banks, NBFCs, Insurance Co’s,
critical
ECBs, Equity (including FDI), Debt Funds,
infrastructure – power, roads, railways,
private equity, ECBs, etc.
ports, transportation systems, and water
However, structural and regulatory barriers
supply and sanitation
investment
that impede the flow of domestic capital
If steps are taken in right direction, it
into infrastructure are:
will put the ball rolling for even higher GDP growth and a more prosperous economy in
the near future (5-7 years)
limits of banks
This subsequently would lead to higher
Asset – Liability mismatch and exposure
High pre-emption of funds from the
demand of capital to fund these projects
banking system
While the government has raised its
investments
savings mobilizers – namely Insurance co’s,
in
infrastructure,
the
investment gap remains daunting with an
Investment restrictions on long-term
pension & provident funds
estimated $1 trillion required to meet the
country’s resource needs over the next five
The shallowness of India’s corporate
bond market
years. Investment in infrastructure has made significant strides, from 5 % of GDP a decade ago to a projected 10 % of GDP during the Twelfth Plan (2012-2017) As
Constrained supply of ECBs
Takeout financing offers a window to
the banks to free their balance sheet from
seen above, financing of this type of
exposure to infrastructure loans, lend to
investment in infrastructure would require
new projects and also enable better
large outlay from the private sector
10
management of the asset liability position.
This is the first and foremost thing to be
However the mechanism has not really
done for financing infrastructure in a
emerged as a game-changer as it does not
sustainable manner. This will lead to
envisage equitable distribution of risks and
sustainable development of infrastructure
benefits.
without jeopardizing the soundness of the financial sector. Project appraisal and
Financiers will now need to take on this
follow-up capabilities of many banks,
new challenge of how to structure their
particularly public sector banks, also need
business model(s) to build a high-return business
in
financing
focused attention and upgradation so that
infrastructure
project viability can be properly evaluated
projects. Infrastructure projects need many
and risk mitigants are provided where
financial products and services beyond debt
needed.
and equity capital

What can be done to boost availability of
Participation
of
State
Governments
capital?
In a federal country like India, participation
The bank-dominated financial system has
and support of the State governments is
been able to step up and meet the needs of
essential
the first wave of private investment in infrastructure.
Going
magnitude
required
of
forward,
for
developing
high
quality
infrastructure. Thus greater participation
the
from states is the call now. This would lead
infrastructure
to progress of states along with the country.
funding is huge and shall require the

following: 
Greater
Improving efficiency of the Corporate
Bond Market
Making the Infrastructure Project(s)
Commercially Viable
The bond market is not that vibrant now.
11

A vibrant corporate bond market will reduce the dependence on the banking
One of the major obstacles in attracting
sector for funds. It is important to broad
foreign debt capital for infrastructure is the
base the investor base by bringing in new classes
of
institutional
investors
Credit Enhancement
sovereign credit rating ceiling. Domestic
(like
investors are also inhibited due to high level of credit risk perception, particularly in the absence of sound bankruptcy framework. A credit
enhancement
mechanism
can
possibly bridge the rating cap between the investment norms, risk perceptions and actual ratings. 
Simplification of Procedures – Enabling
Single Window Clearance It is well recognized that while funding is insurance
companies,
pension
funds,
the
provident funds, etc.) apart from banks into
major
problem for
infrastructure
financing, there are other issues which
this market. As of now, the insurance and
aggravate the problems of raising funds.
pension funds are legally required to invest
These include legal disputes regarding land
a substantial proportion of their funds in
acquisition,
Government Securities. These investment
delay
in
getting
other
clearances (leading to time and cost
requirements limit their ability to invest in
overruns) and linkages (e.g. coal, power,
infrastructure bonds. Further, they can only
water, etc.) among others. It is felt that in
invest in a blue chip stock, which is also
respect of mega-projects, beyond certain
acting as a limiting factor since most of the
cut-off point, single window clearance
SPVs created for infrastructure funding are
approach
unlisted entities.
could
cut
down
the
implementation period. Moreover, we also
12
need to develop new financial markets for
example than China, which has built
municipal bonds to enable infrastructure
infrastructure at a spectacular pace. As a
financing at the grass root levels. We need
result—since the Eighties—it has seen
to create depth, liquidity and vibrancy in
double digit growth and defied the boom
the G-Sec and corporate bond market so as
bust theory of economic cycles.
to enable rising of finance and reduce dependence on the banking system. At the same time, there is a need to widen our investor base and offer adequate risk
“Solving the critical issues with regards to financing will greatly facilitate flow of funds to the projects and help in maintaining asset quality to the comfort of the lenders and other stakeholders. Accelerated infrastructure investments will not only debottleneck the system, it will also create its own demand.“
mitigating financial products, such as, Credit Default Swaps (CDS). A vibrant G-Sec market would facilitate growth of the corporate debt market thereby enabling fund flow through alternate means apart from banks Way Forward: Once we solve the peripheral but critical issues with regards to financing, it will greatly facilitate flow of funds to the projects and help in maintaining asset quality to the comfort of the lenders and other
stakeholders.
Accelerated
infrastructure investments will not only debottleneck the system, it will also create its own demand. There can’t be a better
13
Banking Licenses for the NBFCs: A Necessary Evil?
-
By Hitesh Rohira – SIMSREE
Introduction
decision and implementation up till 2013 after the idea was conceived in 2010.
Banking industry is the backbone of any economy and hence has always attracted
Need and Initial Steps
the attention of policy makers, industrialists
A large part of the sector is government-
as well as of academicians. It acts a catalyst
owned since most major banks were
to build the economy. Historically, banking
nationalized in 1969. But a significant jump
industry in India has been dominated by a
in coverage means large investments and
handful of industrialist, who exploited it for
the government doesn't have the money.
their personal benefits. Post independence
Already the investments in infrastructure
Government has tried to increase the reach of
banks
through
measures
planned for 12th 5yr plan would be a big
like
task as it would call for raising the spending
nationalization initially and later on through
on infrastructure to 7-8 per cent of GDP
liberalization but unfortunately banking
from the present level of 2-3 per cent. But
industry has remained concentrated only in
financial inclusion and competitive banking
urban areas leaving poor people outside the system.
More
than
40%
of
are also important. Hence they considered
Indian
opening up
population does not have access to the
the
banking
system
for
industrial houses and NBFCs and go for new
banking system. So there was a need to
banking licenses after last issued license of
consider issuing new banking licenses for
Yes Bank (2004).
NBFCs and corporate houses. Will it be really beneficial without any side-effects or
UPA government in its election manifesto
it’s a necessary evil which is being
has promised to increase the pace of
implemented even after knowing the side
financial inclusion and since then has taken
effects? This question has delayed the final
measures like Unique Identification Number
14
(UID) initiative, which would do away with
Major
the hassles of KYC (Know Your Customers)
Disallowing Industry houses to run banking
norms. The RBI's major objection was that it
services are:
didn't have enough powers to regulate the
considerations
for
Allowing/
Advantages:
new banks. The agency could remove an errant director, but if an entire bank board
connived in a fraud, it was helpless. But, the
loans sanctioned to the existing customers,
Banking Laws (Amendment) Bill, which gives
vendors,
the RBI more power, has been cleared by
industrial unit are processed 40-45% times
the Lok Sabha in December 2012, as a part
faster than those done by the banks due to
of the government's new reforms package
quicker due-diligence of the clients through
which has arrived with 2014 elections in
already available data.
mind. RBI has also taken a crucial step to
achieve this objective. It intends to provide
Faster-Processing: As per a research
dealers-distributors
Knowledge-Transfer:
The
of
the
existing
industrial houses can also extend the
an opportunity to not only the NBFC’s but
management
also, for very first time to the industrial
expertise
and
strategic
direction of their existing NBFC experience
houses to participate in financial inclusion
to the affiliated banks.
by expanding banking net to the lower
strata of our society.
having certain percent of branches in RBI has been extremely cautious, taking
unbanked rural areas would serve for
more than 2 years in carving out the guidelines
and
clarifications
making
which
betterment of Rural India and help in
corrections,
would
Financial Inclusion: The compulsion of
Financial Inclusion and thus contribute to
provide
the economy more effectively.
directions for selection or rejection of a particular private player for assigning
banking license.
This would improve the quality of financial
Competitive ‘Financial Services’ Sector:
services as there would be more
15
competition among the new and old
Cautious implementation amidst mixed
players.
reaction:
Also
this
would
increase
employment and reduce costs of service to
According to the joint IMF-World Bank
some extent.
Financial Stability Assessment Program
Disadvantages:
(FSAP) for India, the risks in the current context
Self Dealing: ‘Self-dealing’ means that
reforms. Also market sentiments show
bank affiliated to a commercial firm may
positive response.
deny loans to its competitors.
RBI policy on banks acknowledges these
Connected Lending: Also, the risk of companies
risks and aims to address them through
or
several prudent means with NOHC being an
suppliers within the group cannot be ruled
important one of them. It has already
out. Such rotation of funds among related
opened application for licenses which has
parties can make it difficult for the regulator
to
trace
the
sources
may
next to US and Japan by 2025 with such
interests. There exists a possibility that a
to
licenses
Banking Sector to be third largest i.e. only
purposes not considering the depositors’
lending
bank
Boston Consulting Group expects Indian
the bank can route funds to its own
connected
new
outweigh the benefits. On the other hand,
the parent industrial company that set up
for
to be done before 1st July 2013 and the
and
applicants would be listed on RBI’s website
utilization of funds.
for transparency. Applications will be
Conflict of Interest: The industrial houses
screened by RBI and referred to a high level
might take undue advantage to maximize
advisory committee. Tata, Birla, Reliance
their
various
and Mahindra Groups might be the big
instruments, especially when they are
conglomerates who would want a piece of
catering to uneducated people from rural
action.
areas.
Microfinance, LIC and IDFC.
profits
while
selling
16
Others
include
L&T,
SKS
The following are the major guidelines
there is always a risk of an early wiping off
issued by RBI (as quoted since August 2011
of the initial capital. Such small scale banks
to March 2013) for new banking licenses
would also not be able to invest in
followed by the rationale for each:
technology. While a low minimum capital

requirement has these disadvantages, a
It is proposed that the initial minimum
very high minimum cap requirement (say
paid-up capital for a new bank shall be Rs
1000 crore) would evince only those with
500 crore and that a wholly-owned non-
high funds. Such entities would be profit
operative holding company (NOHC) will
oriented and could divert funds to big-ticket
hold the existing businesses and the newly
corporate thereby diluting the purpose of
created bank within itself. Only the nonfinancial
companies
can
have
financial inclusion. Thus the requirement of
a
high enough entry capital can be fulfilled
shareholding in the NOHC. The NOFHC and
only by entities with large surplus of funds
the bank shall not have any exposure to the
that are readily available with the industrial
Promoter Group. The bank shall not invest
houses. It could also act as contingent
in the equity / debt capital instruments of
capital for banks in case of financial shocks.
any financial entities held by the NOFHC.
The creation of an NOHC would enable in
The minimum capital requirement of 500
separating the activities of each of the
crore is laid down such that the capital
subsidiary companies from another and
requirement is not significantly high or not meager.
help in greater regulation by separate
A very low minimum capital
regulators in each of the segmented
requirement (of 200 crore) could attract
spheres. The NOHC will only act as a vehicle
non-serious entities without inadequate
to hold the investments on behalf of the
financial resources to seek for licenses. In such
small scale
promoter/promoter group and will not be
entities, operational
allowed to accept deposits. NOFHC should
inefficiencies may exist as they cannot take
hold a minimum of 40 per cent of the equity
advantage of economies of scale. Further,
capital of the bank with a lock-in period
17
of five years. Later, it has to be brought
released recently. It also allowed public
down to 15 percent within 12 year from
sector entities to apply for the license. But
that onwards. Further, 50 per cent of
winning a license may be tougher for
directors (increased to a majority in some
broking and real estate companies as the
cases)
the
central bank has stipulated that bank
promoter; and the bank, group entities,
promoters’ business culture should not be
non-operating holding company, and the
misaligned with the banking model.
must
be
independent
of
promoter would be subject to RBI’s
consolidated supervision.
Groups with diversified ownership,
sound credentials and integrity that have a
Excepting promoters/promoter groups
successful track record for at least 10 years
that generate more than 10% of revenues or
shall be eligible to promote banks and RBI
have 10% of assets in real estate or broking
may seek feedback on applicants from
services, all private sector players are
other regulators and agencies like Income
eligible to promote banks. The exposure of
Tax, CBI, Enforcement Directorate, etc.
the bank to any entity in the promoter
This
group shall not exceed 10 per cent and the
rule
out
the
first-generation
entrepreneurs setting up a new bank. Also
aggregate exposure to all the entities in the
this would ensure that only financially
group shall not exceed 20 per cent of the
strong companies or groups go for new
paid-up capital and reserves of the bank.
banks.
A clear NO to the businesses in broking
services which comes as lessons from
The newly formed banks must have 25 %
of their branches in unbanked rural areas.
international experience was also suggested by RBI in 2011 owing to the recent financial
The
crises. However, after consultation with the
condition of having 25% of its branches in
finance
unbanked rural areas with population up to
ministry,
RBI
removed
this
banking
regulator put
a
stricter
9,999. Many believe, for a new banking
condition in 2013 in the final guidelines
18
entity, it will be stumbling block as the brick
would help in achieving financial inclusion
and mortar model especially in rural areas
in the long term.
take time to turn profitable. In line with
References:
existing domestic norms, the new bank should also achieve priority sector lending
1. www.rbi.org.in/
target of 40%. Interestingly, most of the
2. www.moneycontrol.com
existing banks are failing to meet the target.
3. www.bseindia.com
But, this is to ensure financial inclusion
4. www.economictimes.indiatimes.co m/
which is the most important criteria for evaluating the applicants for licenses
5. www.financialexpress.com
according to Governor of RBI.
6. http://knowledge.wharton.upenn.e

du/india/ Other important guidelines:
7. http://www.business-
- New banks to get listed within 3 years of
standard.com/article/finance/nod-
business.
to-realtors-and-brokerages-if-fitand-proper-chakrabarty-
- FDI is capped at 49% for the first five years
113022600275_1.html
after which it can extend as per policy
8. http://www.thehindubusinessline.c
norms.
om/industry-and-
Conclusion
economy/banking/new-banklicences-risks-outweigh-benefits-in-
With the advantages and disadvantages
current-context/article4313334.ece
known, acknowledging them RBI is taking
9. http://www.livemint.com
cautious steps in issuing new bank licenses with prudent guidelines. So the net effect will mostly be positive. It will infuse greater competition and thus efficiency in the sector and perhaps a little volatility. But it
19
Financial Sector Legislative Reforms Commission - By SIMSREE Finance Forum The Financial Sector Legislative Reforms Commission
was
setup
post
the contemporary requirements of the
the
sector. Over the years, as the economy and
announcement by Hon. Pranab Mukharjee
the financial system have grown in size and
during the 2011-12 budget. It was setup to
sophistication, an increasing gap has come
help rewriting and harmonizing of the financial
sector
legislation,
rules
about between the requirements of the
and
country
regulations so as to address the immediate
regulatory
and future requirements of the sector. The
present
include
legal
and
Unintended
regulatory
gaps,
overlaps, inconsistencies and regulatory
Justice (Retired) B. N. Srikrishna, and had
arbitrage.
ten members with expertise in the fields of
The
fragmented
regulatory
architecture has led to a loss of scale and
finance, economics, law and other relevant
scope that could be available from a
fields. published
the
arrangements.
consequences
Commission was chaired by Supreme Court
It
and
seamless financial market with all its its
report
and
attendant
has
benefits
of
minimizing
the
recommended a series of changes in the
intermediation cost. The remit of the
entire financial; regulatory and legislative;
Commission is to comprehensively review
setup. According to the report: The setting
and redraft the legislations governing
up of the Commission was the result of a
India’s financial system, in order to evolve a
felt need that the legal and institutional
common set of principles for governance of
structures of the financial sector in India
financial sector regulatory institutions.
need to be reviewed and recast in tune with
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At present the financial market is regulated
When a regulator focuses on one sector,
by RBI, SEBI, IRDA, PFRDA and FMC which
certain
have evolved over the years. The present
administration tend to arise. Assisted by
arrangement has gaps for which no
lobbying of financial firms, the regulator
regulator is in charge – such as the diverse
tends to share the aspirations of the
kinds of ponzi schemes that periodically
regulated financial firms, such as low
surface in India, which are not regulated by
competition,
any of the existing agencies. It also contains
innovation
in
overlaps
profitability,
and
where
conflicts
between
unique
problems
of
preventing
public
financial
other
sectors,
high
high
growth.
These
regulators have consumed the energy of
objectives often conflict with the core
top economic policy makers and held back
economic goals of financial regulation such
market development. This causes a great
as
deal of difficulty in getting issues resolved
resolution. Reflecting these difficulties, the
and the solutions to problem get prolonged.
present
Various examples are present for instance,
architecture has, over the years, been
ULIP scheme, the aggrieved consumer was
universally
being subjected under the jurisdiction turfs
committee reports. The Commission has
between SEBI and IRDA. This kind of egoistic
analyzed the recommendations for reform
tendency would be eliminated if a common
of financial regulatory architecture of all
grievance redressal system is erected.
these
consumer
protection
Indian
financial
criticized
expert
by
committee
and
swift
regulatory
all
expert
reports
and
weighed the arguments presented by each of them. Architecture of the Regulator As per FSLRC’s recommendations, the current list of regulators would be replaced by a horizontal structure whereby the basic
21
regulatory and monitoring functions of all areas would be done by a Unified Financial Agency (UFA) while RBI takes care of banking
and
monetary
policies.
All
consumer complaints will be handled by a Financial Redressal Agency (FRA) and there will be a single tribunal, the Financial Sector Appellate Tribunal (FSAT) which will hear The following table gives an idea about the
appeals regarding the entire sector. This new
horizontal
structure
serves
present and proposed structure of the
the
regulator.
interests of the consumers of financial services much better. Apart from this a
PRESENT
PROPOSED
1. RBI
1. RBI
separate agency would be formed for the purpose of deciding on bank interest rates.
2. SEBI
The commission feels that this structure will reduce the complexities both for consumers and
investors
thus
avoiding
all
3.
the
FMC
(Forward
Markets Commission)
complications like conflicts between two 4.
regulators and others which make it difficult
in
(Insurance Financial and Authority)
Regulatory
for foreign investors to carry out their businesses
IRDA
2. UFA (Unified
Development Authority)
India.
5. PFRDA (Pension Fund Regulatory
and
Development Authority) 6.
SAT
(Securities 3. FSAT (Financial
Appellate Tribunal)
Sector Tribunal
22
Appellate
7.
DICGC
Insurance
(Deposit 4. and
Resolution
of RBI and SEBI. They are not accountable
Credit Corporation
Guarantee Corporation)
to government or court and neither to public. No one could question them even if
5. FRA (Financial
their targets are not achieved. However
Redressal Agency)
when the recommendation of FSLRC are 6. PDMA (Public
implemented there would be certain
Debt Management
objectives which the RBI is bound to
Agency)
achieve and certain rules by which it can 8. FSDC (Financial Stability and Dvlpmt Council)
take decisions. The decision could be challenged in tribunals if found to be faulty. This
Advantages of having a unified regulator 
Accountability
and
is
creates
a
mechanism
of
accountability by creating proper checks and balances. So a written framework
Consumer
friendliness: There can be cases where the
which
bridges the accountability and
consumer is being subjected to the
Independence is welcome.
jurisdiction of more than two regulators. In

Separating complaints and regulators:
such cases there is always an ego problem between the regulators and hence it is the
In the new proposal consumer complaints
consumer who suffers because of delayed
will be separated from the regulator. This is
redressal of complaints.
important
because
certain
classes
of
consumer complaints are full of mistakes or 
Creating checks on the regulators: The
oversights by the regulator at their root.
commission also provides for a written legal
Recognizing
framework i.e. rule of law in decisions of
this
root
cause
means
admitting to its own flaw, something that is
RBI and other regulators. At present there is
hard for any organization. If there is a
little scope to challenge the policy decisions
separate complaints redressal authority
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then such mistakes can be easily identified
Disadvantages of a unified regulator
and corrected.
Splitting NBFCs from the RBI’s ambit:
Practical implementation: Just merging
existing setups under a single banner may look good on paper but may not actually
At present we have a clumsy system for
eliminate the regulatory complexities. Its
governing NBFCs where often regulatory
practical execution will be quite difficult.
differences arise among RBI, SEBI and NHB.
SEBI, IRDA, FMC and PFRDA etc could easily
There are some NBFCs which take deposits
continue operating as isolated departments
while others don’t. The committee has
of a nominally unified financial regulator.
proposed a concrete split i.e. banking and payments with RBI while rest of the areas
lies with UFA. So the NBFCs taking deposits
remain: Banks sometimes take advantage
comes under the purview of RBI and rest of
of the customer’s trust to sell a variety of
them goes with UFA.
other products which the customer might not
Distributing the power to make decisions
Cross-selling menace of the banks to
require
or
afford.
Mostly
rural
housewives and old aged pensioners fall
for monetary policy: Monetary policy
prey to this as they are not so financially
commission will be consisting 7 members
literate. RBI should see that in the name of
where 5 members would be nominated by
increasing business and profit the private
the government, out of five nominated
banks are creating barriers for common
members 2 members will be appointed in
people by asking high minimum balance
consultation with RBI and 3 members at
and charging exorbitant amount in case of
government’s discretion. The advantage is
fall in minimum balance leading to closure
that a committee of experts would be in a
of many accounts. The proposal by the
better position to take such decisions than a
commission is silent on this topic. Thus
single official. After all, collective decision-
before going forward it should be made
making is generally viewed as reducing the
sure that people are not at loss.
probability of error.
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
Increased government control over the
The RBI will be given specific targets which
regulators: At present the RBI and other
it has to attain within a specified frame of
regulators
the
time. These objectives and targets will be
government and their decisions are not
failure standards by which the central bank
influenced by the government. However the
will be measured. Such a thing can put RBI
new proposal will increase the government
under a lot of pressure and can affect its
control over the decision making. Especially
working. However until and unless it is
in case of the monetary policy decisions,
known what are these targets? Is there a
the seven member team will have 5
possibility of assigning weights to these
members nominated by the government
targets at different circumstances? All these
who might be influenced by government
are important part.
are
independent
of
officials to alter or even change the
The possibility of RBI meeting inflation and
decisions.
growth targets in India where much power is held by the government is very less. The
Impact on the powers of RBI: 
FSLRC suggests around 5 odd reforms and it
Presently the finance ministry makes
has to be decided whether all of them have
rules regarding FDI but the rules regarding FIIs,
External
Commercial
to be implemented at the same time or in a
Borrowings
particular sequence. These are analytical
(ECBs), forex loans and fund inflows from
questions which need to be answered
NRIs are made by the RBI. However once
before
the recommendations are accepted these
the
recommendations
can
be
implemented.
powers will no more be with the RBI. This can create a problem especially in a
Thus on the whole the reforms are a step in
situation when the current account deficit
the right direction but its implementation
(CAD) is burgeoning.
and effectiveness still remain a challenge.
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