India’s economy—and its industries—are ever evolving. This is especially true for the financial sector, which is still in a nascent stage in many ways.
Considering this, there is much that emerging markets like India could learn from the problems in the rich world. The Reserve Bank of India’s Financial Stability Report highlights some of these lessons.
Here are six significant issues, according to the report published by India’s central bank:
1. Practices: Developed financial markets that had a careless approach to financial sector regulations are considered to be a major catalyst for the global financial crisis. This resulted in a need for a coordinated and harmonized regulatory response under the guidance of G20, a majority of which were aimed at addressing the shortcomings observed in the advanced financial systems’ approach.
2. Complexity: As a part of the global agenda to serve the need for consistency in formulation and implementation of reforms, the emerging markets and developing economies have had had to contend with regulatory practices that are too complex.
While it is important to learn from the mistakes of others, these markets need simpler regulatory approaches. Approaches that will help them expand their coverage and extend the reach of their financial system.
3. Approach: The regulation needs to keep a watch on the markets and evolve with time. Evolution that will come by continuously learning and updating skill sets. However, just like market failures and resulting crises, regulation comes at a cost.
Though it is difficult to assess the cost impact of a system, the non-occurrence of crises could indicate that the regulation was able to avoid excesses. However, it cannot be an adequate indicator for establishing impact. Such conclusions may compromise the real need for a paradigm shift in the approach to regulation.
4. Innovation: Innovation influences regulation both positively and negatively. Innovation can occur when the scope of regulation is broad. Certain financial sector entities in India have changed their organizational form in the recent past.
This was done so that they could avoid being covered by relatively stricter regulations. These regulations are for entities that raise deposits from the public. An appropriate regulatory stance in such circumstances could be minimizing the cost of compliance for those who are willing to meet the terms. Such a regulatory stance could also make it more difficult and expensive for those who want to avoid the regulation.
5. New regulation: If it is possible that a new regulation could be preceded by uncertainty, then such a regulation will work through the three dimensions of: stringency, flexibility and information. An effective regulatory approach should ultimately result in strengthening market access and market functioning, that will build on and encourage innovation.
6. Risk: Risk-taking is inherent and essential in financial markets. Therefore the current Indian regulatory stance envisions a regulatory regime for the entire financial system that is balanced, predictable, institution-neutral, ownership-neutral and technology-neutral. Banks and other financial intermediaries are not discouraged to take risks. However, these risks must be required, sufficiently acknowledged and be provided buffers for.
finance.yahoo.com
Considering this, there is much that emerging markets like India could learn from the problems in the rich world. The Reserve Bank of India’s Financial Stability Report highlights some of these lessons.
Here are six significant issues, according to the report published by India’s central bank:
1. Practices: Developed financial markets that had a careless approach to financial sector regulations are considered to be a major catalyst for the global financial crisis. This resulted in a need for a coordinated and harmonized regulatory response under the guidance of G20, a majority of which were aimed at addressing the shortcomings observed in the advanced financial systems’ approach.
2. Complexity: As a part of the global agenda to serve the need for consistency in formulation and implementation of reforms, the emerging markets and developing economies have had had to contend with regulatory practices that are too complex.
While it is important to learn from the mistakes of others, these markets need simpler regulatory approaches. Approaches that will help them expand their coverage and extend the reach of their financial system.
3. Approach: The regulation needs to keep a watch on the markets and evolve with time. Evolution that will come by continuously learning and updating skill sets. However, just like market failures and resulting crises, regulation comes at a cost.
Though it is difficult to assess the cost impact of a system, the non-occurrence of crises could indicate that the regulation was able to avoid excesses. However, it cannot be an adequate indicator for establishing impact. Such conclusions may compromise the real need for a paradigm shift in the approach to regulation.
4. Innovation: Innovation influences regulation both positively and negatively. Innovation can occur when the scope of regulation is broad. Certain financial sector entities in India have changed their organizational form in the recent past.
This was done so that they could avoid being covered by relatively stricter regulations. These regulations are for entities that raise deposits from the public. An appropriate regulatory stance in such circumstances could be minimizing the cost of compliance for those who are willing to meet the terms. Such a regulatory stance could also make it more difficult and expensive for those who want to avoid the regulation.
5. New regulation: If it is possible that a new regulation could be preceded by uncertainty, then such a regulation will work through the three dimensions of: stringency, flexibility and information. An effective regulatory approach should ultimately result in strengthening market access and market functioning, that will build on and encourage innovation.
6. Risk: Risk-taking is inherent and essential in financial markets. Therefore the current Indian regulatory stance envisions a regulatory regime for the entire financial system that is balanced, predictable, institution-neutral, ownership-neutral and technology-neutral. Banks and other financial intermediaries are not discouraged to take risks. However, these risks must be required, sufficiently acknowledged and be provided buffers for.
finance.yahoo.com
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