Financial Regulations

Presented by Dr. Medha Shetye

Financial

Regulations
Caption

Price Rigging
 Introduction
• Indian financial structure is diversified.

• Comprises of- Commercial banks, Insurance companies, Non financial banking companies,
Co-operatives,Pension fund, Securities Market and small other entities.

• Dominated by-Banks , Securities, Insurance , NBFC & Pension

• Regulators of the current financial system-

• The Reserve Bank of India (RBI)

• Securities and Exchange Board of India (SEBI)

• Insurance Regulatory and Development Authority (IRDA)

• The Pension Funds Regulatory and Development Authority (PFRDA)

• Ministry of Finance

• Ministry of External Affairs

 Salient Features of the Regulations
•Mandate of all regulators-

• Protect the interests of customers

• Each regulator have their own rules

• Enforce applicable laws

• Prevent manipulation

• Competency of services

• Conduct inspections

• Investigate & prosecute misconduct

 Multiple Regulators is it a problem?

Yes to a certain extent.

Leads to regulatory arbitrage

The existing framework also contains overlaps between laws and agencies

India has over 60 Acts and multiple rules / regulations that govern the financial sector

Legislations are old in time

Along with financial globalization, complexities of financial regulation have also increased.
 Financial Sector Reforms in India
•Early 1990s -Restricted to the function of channeling resources from the surplus to
deficit sectors

•1990 Introduction of LPG

•In the banking sector -

•Non-banking financial intermediaries -

•Insurance sector and mutual funds-

•Financial markets -

•Commercial banking sector-

 Advantages of Reforms
Growth & momentum in the financial sector

Financial innovations

Regulations have enabled transparency

Market capitalization-to-GDP ratio increased

Though they have progressed, it is not sufficient

 The Financial Sector Legislative Reforms Commission (FSLRC)
FSLRC is a body set up by the Government of India, Ministry of Finance, on 24 March 2011, to review
and rewrite the legal-institutional architecture of the Indian financial sector.

Most important of the recommended changes by FSLRC -

•The decision to merge the roles of the Securities and Exchange Board of India, the Forward Markets
Commission, Insurance Regulatory and Development Authority, and Pension Fund Regulatory and
Development Authority into a single regulator called the “Unified Financial Agency” (UFA),

•Reserve Bank of India (RBI),-To regulate banking and the payments system,

•Financial Stability Development Council (FSDC) -To monitor and address systemic risk, which is to be
led by the finance ministry.

•Creation of a Resolution Corporation -To identify institutions that are threatened by insolvency and
resolve the problem at an early stage

•Creation of a Public Debt Management Agency -To take the responsibility of public debt Management
away from the RBI.
 Reserve Bank of India
• Central Bank -setup in 1935 in Calcutta, under special act

• Nationalized in1949, has 19 regional offices and sub offices

• Owned by the Government

• Functions of RBI

• Issuer of currency notes

• Banker to government

• Controls other commercial banks

• Controls credit

• Lender of the banks

• Economic development

• Managing Exchange rates

• Call for credit information

 Monetary Policy
• Control the supply of money

• Bank Rate- A rate at which RBI lends money to commercial banks

without a collateral

• It is a rate at which RBI discounts bills

• Open Market operations-

• RBI buys and sells securities in the open market to increase or

decrease the supply of money

Changing the reserve ratio

Exercising selective credit control

• Moral Suasion
 Monetary Policy
• Role of monetary policy for economic stability of the
economy

• Increase rate of savings

• Mobilize the savings
• Increase the rate of investment
• Allocation of investments for productive purpose
•Rate of inflation should be reasonable otherwise affects
negatively.
 Global Financial Crisis
• (GFC) refers to the period of extreme stress in global financial markets
and banking systems

• Between mid 2007 and early 2009

• During the GFC, a downturn in the US housing market that spread

from the United States to the rest of the world

• Many banks around the world incurred large losses

• Deepest recessions
 Causes of GFC
Excessive risk-taking in a favorable macroeconomic environment

Economic conditions in the United States and other countries were favourable

In this environment, house prices grew strongly

Borrow imprudently to purchase and build houses

A similar expectation in European countries

A large share of such risky borrowing

Competition increased among lenders

Did not closely assess borrowers’ abilities

Mortgage-backed securities’ (MBS),

Increased borrowing by banks and investors

Borrowed increasing amounts

Regulation and policy errors

Insufficient regulation
 How the GFC Unfolded
• US house prices fell, borrowers missed repayments

• Borrowers that failed to make their loan repayments began to rise.

• Loan repayments were particularly sensitive to house prices
• Stresses in the financial system

• Lenders and investors began to incur large losses

• Investors became less willing to purchase MBS products
• Spillovers to other countries

• Interconnections provided a channel for the problems

• Failure of financial firms, panic in financial markets

• Investors began pulling their money out of banks and investment funds around the world
• Financial markets became dysfunctional
• Economies fell into their deepest recessions
 Policy Responses
• Lower interest rates
• Central banks lowered interest rates
• Purchased a substantial amount of financial securities
• Increased government spending
• Guaranteed deposits and bank bonds

• Stimulate demand and support employment

• The policy response prevented a global depression

• Stronger oversight of financial firms
• New global regulations

• Regulators are also more vigilant

 Transmission to Indian banking sector

• Limited direct transmission

• Factors insulated the banking sector

• Stringent regulation and consequent limited integration with the global

financial system

• Banks are not permitted to borrow outside of the country for lending
purposes

• The presence of foreign banks low

• Not much exposure to sophisticated investment products

 Bulwark against a crisis in the banking sector

•Precautionary norms of the Reserve Bank of India

•Pervasive use of ‘black money’ in the economy

Despite an unprecedented global recession, India remained the second

fastest growing economy in the world
THANK YOU

Dr. Medha Shetye