2

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!

EDITORIAL

3

1. What are the general roles of wealth

management industry and what is your

take on the current wealth management

industry?

Ans. Wealth management industry is a tiny

industry currently in India. It has not

expanded to the scale to which it has grown

in the developed markets. People generally

have small savings with them and they like

to invest in gold. People also invest in real

estate properties but that is limited to a

very small percentage of people .Wealth

management awareness exists amongst

such small percentage of people. People

also use LIC schemes for tax savings but

people think that they are a kind of forced

savings as they view LIC policies as a source

to save their tax. Gradually after

liberalization, foreign banks have entered

India bringing in their best practices. Public

Sector Banks (PSB) initially used to have

only a single point of contact like the

manager for any queries regarding the

investments that people have to make. But

now with the advent of technology and

rapid growth in the economy and with the

increase in the income levels of the people

,banks now have multiple desks in their

branches for the different types of savings

account they need to have. Agents are also

responsible for the spreading awareness

amongst the people regarding their savings

and investments. Industry in recent times

has become a lot more complex and

dynamic. Previously one was able to

guarantee a fixed percentage of return on

the investments made but no more is the

same scenario. One cannot guarantee a

fixed percentage of return .Indian industry

is a sunrise industry with a tremendous

potential for growth to tap large untapped

markets.

Interview: Mr. Gajendra

Kothari,

CEO and MD, Etica Wealth

Management

4

2. What is your take on the Financial

awareness amongst the people in the tier2

and lower tier cities and how do you think

financial awareness could be spread?

Ans. Only around 10 % people are

financially literate in the tier2 and lower tier

cities and around 30-35 % people are

financially literate in metros like Mumbai,

so a lot more needs to be done in order to

increase awareness amongst the people.

Even in a metro like Mumbai which is the

financial hub of India, a lot more potential is

there for the growth of wealth

management industry because of the lack

of financial literacy amongst the people.

The other difference between the people in

the metros and the smaller cities is that the

people in the metro don’t have time which

they can spend to make themselves learn

the basics of financial investment while the

people in the smaller towns and cities do

get time to learn these basics more thing

that can be done is to teach normal

economic terms in an engaging manner in

the schools to spread awareness amongst

people regarding their savings and

investments.

3. Can agents be used to spread awareness

about financial planning?

Ans. The agents can be thought to be a full

fledged advisors rather than just Life

insurance agents as it will help to spread

the financial awareness more quickly and

easily and also broaden their thinking .RBI is

also using retired bankers and teachers to

spread financial awareness which is a very

good initiative.

4. What is the time horizon for investing in

mutual funds?

Ans. First of all a mutual fund should not be

bought randomly just for the sake of

making quick money. Some basic things

which they need to keep in mind before

investing is that they need to know for what

they are investing, how much money they

are investing, what is their financial goal for

which they are investing, what is the time

period over which they would like to get the

desired return. They need to keep in mind

the financial goal they have and the not

5

kind of returns that they will get in short

term.

5. How to woo investors to save money in

Mutual Funds?

Ans. One can show them a comparative

analysis about the performance of various

mutual fund providers and the rate of

return that they get over a period. They

need be taught that if one puts money in

saving schemes and if inflation is more than

savings rate then there is no point in

putting money in savings scheme.

6. Why don’t people invest in real estate?

Ans. The main reason is the huge sum of

money required to but a property which

majority of the people can’t afford.

7. How to bring money into the equity

market rather than gold?

Ans. To create a separate vehicle for

equities because if money flows into equity

then it is the main source of financing for

many industries which plays a part in the

development of an economy .People can be

wooed by providing tax benefits on the

money they put into equities .Gold is an

illiquid asset which doesn’t pump in the

money into the economy.

8. What is your take on the Rajiv Gandhi

mutual Fund scheme?

Ans. It is a good initiative but gain too many

complexities will hamper the scheme. It is a

separate scheme where one can save

additional 50000 rupees apart from 1 lakh

rupees under 80C.But again the major

drawback is that only new investors are

allowed who haven’t yet opened any demat

account so the scope of existing investors

investing is closed down.

9. Why are the ETF schemes not working?

Ans. They are very specialized schemes.

People in general aren’t aware of the plain

vanilla products being offered so the scope

of development of ETF schemes

automatically reduces .Majority of the

people do not have demat accounts which

is pre-requisite for ETFs.Unlike ETfs gold

and FDs are very easy to understand

products which even a layman can

understand and invest in.

6

10. What is your take on budget w.r.t.

investments?

Ans. No changes as such have been made in

this budget to make the investments

lucrative.

“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 “

FIN-QUIZ

1. A US denominated bond that

is publicly issued in US

2. Foreign exchange contracts

which provide for settlement

on the 1st working day after

the contract day

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

7

- By Mr. Vishal Bhambhani, Alumni

Infrastructure – an asset class comprises of:

Power generation, transmission &

distribution

Development of Roads, bridges,

runways

Airport and seaport development

Railway tracks, signaling system,

stations

Telephone lines, telecommunications

network

Pipelines for water, crude oil, slurry,

waterways

Canal networks for irrigation, sanitation

or sewerage

Out of the above, power, roads, seaports &

airports form a major chunk of required

/envisaged investment (public and private)

w.r.t physical infrastructure development.

As an investment asset class,

“infrastructure” has the following:

Basic Characteristics:

Building infrastructure is a capital-

intensive process, with large initial costs

and low operating costs.

It requires long term finance as the

gestation period is often much longer than

say a manufacturing plant

These projects are characterized by

non-recourse or limited-recourse financing;

i.e. lenders can only be repaid from the

revenues generated from the project

Market and commercial risks related to

uncertainty of demand (traffic) forecasts

are of greater importance

Have unique risks of public interest

nature of most projects and interface with

regulators and Govt. agencies

Infrastructure Financing

- India

8

In some cases, projects have significant

externalities wherein the social returns

exceed the private returns – which in

turn calls for some form of subsidization like

Viability Gap Funding, Govt. guarantees,

grants, etc

Funding of an infrastructure project takes

place with an objective of:

“Financing a single purpose capital asset

within a Legally independent project

company (SPV) usually with a limited life”

Structure of Infra – financing:(Diagram on

next page)

Project Financing is an option granted by

the financier- exercisable when an entity

demonstrates that it can generate cash

flows in accordance with long term

forecasts. The assets, rights and interests of

the development are usually structured into

a special – purpose vehicle (SPV) and are

legally secured to the financiers as

collateral. A typical example of

arrangements made by a SPV of an

infrastructure project is shown below:

Developer/Promoter’s perspective

(Shareholders): To maximize ROE and

minimize the payback period of the equity

investment.

Lender’s perspective: Financial viable

project with scheduled repayment(s) of

loan and visibility of future cash flows with

maximum certainty

Authority’s perspective: Timely

implementation of the project with

maximum utility to the users of the

infrastructure at minimum cost to the ex-

chequer.

Purchaser/Customer’s perspective:

Availability of better quality infrastructure

at affordable cost.

The satisfactory combination of the above 4

stakeholders leads to a somewhat

practically unattainable solution but has to

be dealt with in a non-orthodox way by

safeguarding each stakeholder’s interests –

which calls for usage of innovative financial

products or in simple terms – Financial

Engineering

9

Infrastructure Finance – Indian scenario:

India is among the top 3 fastest growing

economies in the world; however, the GDP

growth is constrained by lack of

infrastructure development in the country

which is evident from the fact that:

(Source: World Economic Forum’s Global Competitiveness Index)

India ranks 91st in the world in availability of

overall quality of infrastructure.

India's logistic cost as a percentage of

the GDP is unusually high - double that of

developed countries and substantially

higher than BRIC countries

India's over dependence on road freight

means that logistic cost as a percentage of

GDP is as high as 13%-14% compared to

7%-8% in developed countries and 9%-10%

in other BRIC countries

India’s industries suffer from chronic power

cuts; exports are delayed because of poor

roads and congested ports. Office-goers

spend hours stuck in traffic; villagers get

electricity for only 6 to 8 hours a day.

Economists estimate that ~ 2 % of GDP is

lost owing to poor infrastructure.

10

Considering all of the above:

India’s growing economy is placing huge

demands on development of critical

infrastructure – power, roads, railways,

ports, transportation systems, and water

supply and sanitation

If steps are taken in right direction, it

will put the ball rolling for even higher GDP

growth and a more prosperous economy in

the near future (5-7 years)

This subsequently would lead to higher

demand of capital to fund these projects

While the government has raised its

investments in infrastructure, the

investment gap remains daunting with an

estimated $1 trillion required to meet the

country’s resource needs over the next five

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

seen above, financing of this type of

investment in infrastructure would require

large outlay from the private sector

Private investment avenues: Funding

avenues for projects comprise of

commercial banks, NBFCs, Insurance Co’s,

ECBs, Equity (including FDI), Debt Funds,

private equity, ECBs, etc.

However, structural and regulatory barriers

that impede the flow of domestic capital

into infrastructure are:

Asset – Liability mismatch and exposure

limits of banks

High pre-emption of funds from the

banking system

Investment restrictions on long-term

savings mobilizers – namely Insurance co’s,

pension & provident funds

The shallowness of India’s corporate

bond market

Constrained supply of ECBs

Takeout financing offers a window to

the banks to free their balance sheet from

exposure to infrastructure loans, lend to

new projects and also enable better

11

management of the asset liability position.

However the mechanism has not really

emerged as a game-changer as it does not

envisage equitable distribution of risks and

benefits.

Financiers will now need to take on this

new challenge of how to structure their

business model(s) to build a high-return

business in financing infrastructure

projects. Infrastructure projects need many

financial products and services beyond debt

and equity capital

What can be done to boost availability of

capital?

The bank-dominated financial system has

been able to step up and meet the needs of

the first wave of private investment in

infrastructure. Going forward, the

magnitude of required infrastructure

funding is huge and shall require the

following:

Making the Infrastructure Project(s)

Commercially Viable

This is the first and foremost thing to be

done for financing infrastructure in a

sustainable manner. This will lead to

sustainable development of infrastructure

without jeopardizing the soundness of the

financial sector. Project appraisal and

follow-up capabilities of many banks,

particularly public sector banks, also need

focused attention and upgradation so that

project viability can be properly evaluated

and risk mitigants are provided where

needed.

Greater Participation of State

Governments

In a federal country like India, participation

and support of the State governments is

essential for developing high quality

infrastructure. Thus greater participation

from states is the call now. This would lead

to progress of states along with the country.

Improving efficiency of the Corporate

Bond Market

The bond market is not that vibrant now.

12

A vibrant corporate bond market will

reduce the dependence on the banking

sector for funds. It is important to broad

base the investor base by bringing in new

classes of institutional investors (like

insurance companies, pension funds,

provident funds, etc.) apart from banks into

this market. As of now, the insurance and

pension funds are legally required to invest

a substantial proportion of their funds in

Government Securities. These investment

requirements limit their ability to invest in

infrastructure bonds. Further, they can only

invest in a blue chip stock, which is also

acting as a limiting factor since most of the

SPVs created for infrastructure funding are

unlisted entities.

Credit Enhancement

One of the major obstacles in attracting

foreign debt capital for infrastructure is the

sovereign credit rating ceiling. Domestic

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

the major problem for infrastructure

financing, there are other issues which

aggravate the problems of raising funds.

These include legal disputes regarding land

acquisition, delay in getting other

clearances (leading to time and cost

overruns) and linkages (e.g. coal, power,

water, etc.) among others. It is felt that in

respect of mega-projects, beyond certain

cut-off point, single window clearance

approach could cut down the

implementation period. Moreover, we also

13

need to develop new financial markets for

municipal bonds to enable infrastructure

financing at the grass root levels. We need

to create depth, liquidity and vibrancy in

the G-Sec and corporate bond market so as

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

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 de-

bottleneck the system, it will also create its

own demand. There can’t be a better

example than China, which has built

infrastructure at a spectacular pace. As a

result—since the Eighties—it has seen

double digit growth and defied the boom

bust theory of economic cycles.

“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 de-

bottleneck the system, it will

also create its own demand.“

14

- By Hitesh Rohira – SIMSREE

Introduction

Banking industry is the backbone of any

economy and hence has always attracted

the attention of policy makers, industrialists

as well as of academicians. It acts a catalyst

to build the economy. Historically, banking

industry in India has been dominated by a

handful of industrialist, who exploited it for

their personal benefits. Post independence

Government has tried to increase the reach

of banks through measures like

nationalization initially and later on through

liberalization but unfortunately banking

industry has remained concentrated only in

urban areas leaving poor people outside the

system. More than 40% of Indian

population does not have access to the

banking system. So there was a need to

consider issuing new banking licenses for

NBFCs and corporate houses. Will it be

really beneficial without any side-effects or

it’s a necessary evil which is being

implemented even after knowing the side

effects? This question has delayed the final

decision and implementation up till 2013

after the idea was conceived in 2010.

Need and Initial Steps

A large part of the sector is government-

owned since most major banks were

nationalized in 1969. But a significant jump

in coverage means large investments and

the government doesn't have the money.

Already the investments in infrastructure

planned for 12th 5yr plan would be a big

task as it would call for raising the spending

on infrastructure to 7-8 per cent of GDP

from the present level of 2-3 per cent. But

financial inclusion and competitive banking

are also important. Hence they considered

opening up the banking system for

industrial houses and NBFCs and go for new

banking licenses after last issued license of

Yes Bank (2004).

UPA government in its election manifesto

has promised to increase the pace of

financial inclusion and since then has taken

measures like Unique Identification Number

Banking Licenses for the

NBFCs: A Necessary Evil?

15

(UID) initiative, which would do away with

the hassles of KYC (Know Your Customers)

norms. The RBI's major objection was that it

didn't have enough powers to regulate the

new banks. The agency could remove an

errant director, but if an entire bank board

connived in a fraud, it was helpless. But, the

Banking Laws (Amendment) Bill, which gives

the RBI more power, has been cleared by

the Lok Sabha in December 2012, as a part

of the government's new reforms package

which has arrived with 2014 elections in

mind. RBI has also taken a crucial step to

achieve this objective. It intends to provide

an opportunity to not only the NBFC’s but

also, for very first time to the industrial

houses to participate in financial inclusion

by expanding banking net to the lower

strata of our society.

RBI has been extremely cautious, taking

more than 2 years in carving out the

guidelines and making corrections,

clarifications which would provide

directions for selection or rejection of a

particular private player for assigning

banking license.

Major considerations for Allowing/

Disallowing Industry houses to run banking

services are:

Advantages:

Faster-Processing: As per a research

loans sanctioned to the existing customers,

vendors, dealers-distributors of the

industrial unit are processed 40-45% times

faster than those done by the banks due to

quicker due-diligence of the clients through

already available data.

Knowledge-Transfer: The existing

industrial houses can also extend the

management expertise and strategic

direction of their existing NBFC experience

to the affiliated banks.

Financial Inclusion: The compulsion of

having certain percent of branches in

unbanked rural areas would serve for

betterment of Rural India and help in

Financial Inclusion and thus contribute to

the economy more effectively.

Competitive ‘Financial Services’ Sector:

This would improve the quality of financial

services as there would be more

16

competition among the new and old

players. Also this would increase

employment and reduce costs of service to

some extent.

Disadvantages:

Self Dealing: ‘Self-dealing’ means that

the parent industrial company that set up

the bank can route funds to its own

purposes not considering the depositors’

interests. There exists a possibility that a

bank affiliated to a commercial firm may

deny loans to its competitors.

Connected Lending: Also, the risk of

connected lending to companies or

suppliers within the group cannot be ruled

out. Such rotation of funds among related

parties can make it difficult for the

regulator to trace the sources and

utilization of funds.

Conflict of Interest: The industrial houses

might take undue advantage to maximize

their profits while selling various

instruments, especially when they are

catering to uneducated people from rural

areas.

Cautious implementation amidst mixed

reaction:

According to the joint IMF-World Bank

Financial Stability Assessment Program

(FSAP) for India, the risks in the current

context for new bank licenses may

outweigh the benefits. On the other hand,

Boston Consulting Group expects Indian

Banking Sector to be third largest i.e. only

next to US and Japan by 2025 with such

reforms. Also market sentiments show

positive response.

RBI policy on banks acknowledges these

risks and aims to address them through

several prudent means with NOHC being an

important one of them. It has already

opened application for licenses which has

to be done before 1st July 2013 and the

applicants would be listed on RBI’s website

for transparency. Applications will be

screened by RBI and referred to a high level

advisory committee. Tata, Birla, Reliance

and Mahindra Groups might be the big

conglomerates who would want a piece of

action. Others include L&T, SKS

Microfinance, LIC and IDFC.

17

The following are the major guidelines

issued by RBI (as quoted since August 2011

to March 2013) for new banking licenses

followed by the rationale for each:

It is proposed that the initial minimum

paid-up capital for a new bank shall be Rs

500 crore and that a wholly-owned non-

operative holding company (NOHC) will

hold the existing businesses and the newly

created bank within itself. Only the non-

financial companies can have a

shareholding in the NOHC. The NOFHC and

the bank shall not have any exposure to the

Promoter Group. The bank shall not invest

in the equity / debt capital instruments of

any financial entities held by the NOFHC.

The minimum capital requirement of 500

crore is laid down such that the capital

requirement is not significantly high or not

meager. A very low minimum capital

requirement (of 200 crore) could attract

non-serious entities without inadequate

financial resources to seek for licenses. In

such small scale entities, operational

inefficiencies may exist as they cannot take

advantage of economies of scale. Further,

there is always a risk of an early wiping off

of the initial capital. Such small scale banks

would also not be able to invest in

technology. While a low minimum capital

requirement has these disadvantages, a

very high minimum cap requirement (say

1000 crore) would evince only those with

high funds. Such entities would be profit

oriented and could divert funds to big-ticket

corporate thereby diluting the purpose of

financial inclusion. Thus the requirement of

high enough entry capital can be fulfilled

only by entities with large surplus of funds

that are readily available with the industrial

houses. It could also act as contingent

capital for banks in case of financial shocks.

The creation of an NOHC would enable in

separating the activities of each of the

subsidiary companies from another and

help in greater regulation by separate

regulators in each of the segmented

spheres. The NOHC will only act as a vehicle

to hold the investments on behalf of the

promoter/promoter group and will not be

allowed to accept deposits. NOFHC should

hold a minimum of 40 per cent of the equity

capital of the bank with a lock-in period

18

of five years. Later, it has to be brought

down to 15 percent within 12 year from

that onwards. Further, 50 per cent of

directors (increased to a majority in some

cases) must be independent of the

promoter; and the bank, group entities,

non-operating holding company, and the

promoter would be subject to RBI’s

consolidated supervision.

Excepting promoters/promoter groups

that generate more than 10% of revenues or

have 10% of assets in real estate or broking

services, all private sector players are

eligible to promote banks. The exposure of

the bank to any entity in the promoter

group shall not exceed 10 per cent and the

aggregate exposure to all the entities in the

group shall not exceed 20 per cent of the

paid-up capital and reserves of the bank.

A clear NO to the businesses in broking

services which comes as lessons from

international experience was also suggested

by RBI in 2011 owing to the recent financial

crises. However, after consultation with the

finance ministry, RBI removed this

condition in 2013 in the final guidelines

released recently. It also allowed public

sector entities to apply for the license. But

winning a license may be tougher for

broking and real estate companies as the

central bank has stipulated that bank

promoters’ business culture should not be

misaligned with the banking model.

Groups with diversified ownership,

sound credentials and integrity that have a

successful track record for at least 10 years

shall be eligible to promote banks and RBI

may seek feedback on applicants from

other regulators and agencies like Income

Tax, CBI, Enforcement Directorate, etc.

This rule out the first-generation

entrepreneurs setting up a new bank. Also

this would ensure that only financially

strong companies or groups go for new

banks.

The newly formed banks must have 25 %

of their branches in unbanked rural areas.

The banking regulator put a stricter

condition of having 25% of its branches in

unbanked rural areas with population up to

9,999. Many believe, for a new banking

19

entity, it will be stumbling block as the brick

and mortar model especially in rural areas

take time to turn profitable. In line with

existing domestic norms, the new bank

should also achieve priority sector lending

target of 40%. Interestingly, most of the

existing banks are failing to meet the target.

But, this is to ensure financial inclusion

which is the most important criteria for

evaluating the applicants for licenses

according to Governor of RBI.

Other important guidelines:

- New banks to get listed within 3 years of

business.

- FDI is capped at 49% for the first five years

after which it can extend as per policy

norms.

Conclusion

With the advantages and disadvantages

known, acknowledging them RBI is taking

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

would help in achieving financial inclusion

in the long term.

References:

1. www.rbi.org.in/

2. www.moneycontrol.com

3. www.bseindia.com

4. www.economictimes.indiatimes.co

m/

5. www.financialexpress.com

6. http://knowledge.wharton.upenn.e

du/india/

7. http://www.business-

standard.com/article/finance/nod-

to-realtors-and-brokerages-if-fit-

and-proper-chakrabarty-

113022600275_1.html

8. http://www.thehindubusinessline.c

om/industry-and-

economy/banking/new-bank-

licences-risks-outweigh-benefits-in-

current-context/article4313334.ece

9. http://www.livemint.com

20

- By SIMSREE Finance Forum

The Financial Sector Legislative Reforms

Commission was setup post the

announcement by Hon. Pranab Mukharjee

during the 2011-12 budget. It was setup to

help rewriting and harmonizing of the

financial sector legislation, rules and

regulations so as to address the immediate

and future requirements of the sector. The

Commission was chaired by Supreme Court

Justice (Retired) B. N. Srikrishna, and had

ten members with expertise in the fields of

finance, economics, law and other relevant

fields.

It published its report and has

recommended a series of changes in the

entire financial; regulatory and legislative;

setup. According to the report: The setting

up of the Commission was the result of a

felt need that the legal and institutional

structures of the financial sector in India

need to be reviewed and recast in tune with

the contemporary requirements of the

sector. Over the years, as the economy and

the financial system have grown in size and

sophistication, an increasing gap has come

about between the requirements of the

country and the present legal and

regulatory arrangements. Unintended

consequences include regulatory gaps,

overlaps, inconsistencies and regulatory

arbitrage. The fragmented regulatory

architecture has led to a loss of scale and

scope that could be available from a

seamless financial market with all its

attendant benefits of minimizing the

intermediation cost. The remit of the

Commission is to comprehensively review

and redraft the legislations governing

India’s financial system, in order to evolve a

common set of principles for governance of

financial sector regulatory institutions.

Financial Sector Legislative

Reforms Commission

21

At present the financial market is regulated

by RBI, SEBI, IRDA, PFRDA and FMC which

have evolved over the years. The present

arrangement has gaps for which no

regulator is in charge – such as the diverse

kinds of ponzi schemes that periodically

surface in India, which are not regulated by

any of the existing agencies. It also contains

overlaps where conflicts between

regulators have consumed the energy of

top economic policy makers and held back

market development. This causes a great

deal of difficulty in getting issues resolved

and the solutions to problem get prolonged.

Various examples are present for instance,

ULIP scheme, the aggrieved consumer was

being subjected under the jurisdiction turfs

between SEBI and IRDA. This kind of egoistic

tendency would be eliminated if a common

grievance redressal system is erected.

When a regulator focuses on one sector,

certain unique problems of public

administration tend to arise. Assisted by

lobbying of financial firms, the regulator

tends to share the aspirations of the

regulated financial firms, such as low

competition, preventing financial

innovation in other sectors, high

profitability, and high growth. These

objectives often conflict with the core

economic goals of financial regulation such

as consumer protection and swift

resolution. Reflecting these difficulties, the

present Indian financial regulatory

architecture has, over the years, been

universally criticized by all expert

committee reports. The Commission has

analyzed the recommendations for reform

of financial regulatory architecture of all

these expert committee 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

22

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

appeals regarding the entire sector. This

new horizontal structure serves the

interests of the consumers of financial

services much better. Apart from this a

separate agency would be formed for the

purpose of deciding on bank interest rates.

The commission feels that this structure will

reduce the complexities both for consumers

and investors thus avoiding all the

complications like conflicts between two

regulators and others which make it difficult

for foreign investors to carry out their

businesses in India.

The following table gives an idea about the

present and proposed structure of the

regulator.

PRESENT PROPOSED

1. RBI 1. RBI

2. SEBI

2. UFA (Unified

Financial

Authority)

3. FMC (Forward

Markets Commission)

4. IRDA (Insurance

Regulatory and

Development Authority)

5. PFRDA (Pension Fund

Regulatory and

Development Authority)

6. SAT (Securities

Appellate Tribunal)

3. FSAT (Financial

Sector Appellate

Tribunal

23

7. DICGC (Deposit

Insurance and Credit

Guarantee Corporation)

4. Resolution

Corporation

5. FRA (Financial

Redressal Agency)

6. PDMA (Public

Debt Management

Agency)

8. FSDC (Financial Stability and Dvlpmt Council)

Advantages of having a unified regulator

Accountability and Consumer

friendliness: There can be cases where the

consumer is being subjected to the

jurisdiction of more than two regulators. In

such cases there is always an ego problem

between the regulators and hence it is the

consumer who suffers because of delayed

redressal of complaints.

Creating checks on the regulators: The

commission also provides for a written legal

framework i.e. rule of law in decisions of

RBI and other regulators. At present there is

little scope to challenge the policy decisions

of RBI and SEBI. They are not accountable

to government or court and neither to

public. No one could question them even if

their targets are not achieved. However

when the recommendation of FSLRC are

implemented there would be certain

objectives which the RBI is bound to

achieve and certain rules by which it can

take decisions. The decision could be

challenged in tribunals if found to be faulty.

This is creates a mechanism of

accountability by creating proper checks

and balances. So a written framework

which bridges the accountability and

Independence is welcome.

Separating complaints and regulators:

In the new proposal consumer complaints

will be separated from the regulator. This is

important because certain classes of

consumer complaints are full of mistakes or

oversights by the regulator at their root.

Recognizing this root cause means

admitting to its own flaw, something that is

hard for any organization. If there is a

separate complaints redressal authority

24

then such mistakes can be easily identified

and corrected.

Splitting NBFCs from the RBI’s ambit:

At present we have a clumsy system for

governing NBFCs where often regulatory

differences arise among RBI, SEBI and NHB.

There are some NBFCs which take deposits

while others don’t. The committee has

proposed a concrete split i.e. banking and

payments with RBI while rest of the areas

lies with UFA. So the NBFCs taking deposits

comes under the purview of RBI and rest of

them goes with UFA.

Distributing the power to make decisions

for monetary policy: Monetary policy

commission will be consisting 7 members

where 5 members would be nominated by

the government, out of five nominated

members 2 members will be appointed in

consultation with RBI and 3 members at

government’s discretion. The advantage is

that a committee of experts would be in a

better position to take such decisions than a

single official. After all, collective decision-

making is generally viewed as reducing the

probability of error.

Disadvantages of a unified regulator

Practical implementation: Just merging

existing setups under a single banner may

look good on paper but may not actually

eliminate the regulatory complexities. Its

practical execution will be quite difficult.

SEBI, IRDA, FMC and PFRDA etc could easily

continue operating as isolated departments

of a nominally unified financial regulator.

Cross-selling menace of the banks to

remain: Banks sometimes take advantage

of the customer’s trust to sell a variety of

other products which the customer might

not require or afford. Mostly rural

housewives and old aged pensioners fall

prey to this as they are not so financially

literate. RBI should see that in the name of

increasing business and profit the private

banks are creating barriers for common

people by asking high minimum balance

and charging exorbitant amount in case of

fall in minimum balance leading to closure

of many accounts. The proposal by the

commission is silent on this topic. Thus

before going forward it should be made

sure that people are not at loss.

25

Increased government control over the

regulators: At present the RBI and other

regulators are independent of the

government and their decisions are not

influenced by the government. However the

new proposal will increase the government

control over the decision making. Especially

in case of the monetary policy decisions,

the seven member team will have 5

members nominated by the government

who might be influenced by government

officials to alter or even change the

decisions.

Impact on the powers of RBI:

Presently the finance ministry makes

rules regarding FDI but the rules regarding

FIIs, External Commercial Borrowings

(ECBs), forex loans and fund inflows from

NRIs are made by the RBI. However once

the recommendations are accepted these

powers will no more be with the RBI. This

can create a problem especially in a

situation when the current account deficit

(CAD) is burgeoning.

The RBI will be given specific targets which

it has to attain within a specified frame of

time. These objectives and targets will be

failure standards by which the central bank

will be measured. Such a thing can put RBI

under a lot of pressure and can affect its

working. However until and unless it is

known what are these targets? Is there a

possibility of assigning weights to these

targets at different circumstances? All these

are important part.

The possibility of RBI meeting inflation and

growth targets in India where much power

is held by the government is very less. The

FSLRC suggests around 5 odd reforms and it

has to be decided whether all of them have

to be implemented at the same time or in a

particular sequence. These are analytical

questions which need to be answered

before the recommendations can be

implemented.

Thus on the whole the reforms are a step in

the right direction but its implementation

and effectiveness still remain a challenge.

26

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