Markets cool to Rajan proposals

MUMBAI: The Raghuram Rajan report on financial sector reforms received a lukewarm response from financial sector and market participants on the first day.

A day after the report was released by newspapers on Monday, banking heads were too busy to go through its contents in detail.

The stock market also largely ignored the report, though the 12-member panel recommended further opening up of banking, provident funds, insurance and interest rates and greater foreign participation of foreign investors in markets.

Headed by former International Monetary Fund chief economist Raghuram Rajan and consisting top bankers like SBI’s O P Bhatt, ICICI Bank’s K V Kamath and Kotak Mahindra Bank’s Uday Kotak, the panel has mooted 35 proposals to reform the financial sector.

The recommendations include opening up the rupee, corporate bond and government bond market to foreign investors, selling the government’s sake in small,
underperforming public sector banks and increasing the power of large public banks.

The committee, which was formed in August 2007 by the Planning Commission to propose reforms for the financial sector, has put a draft report on the commission’s website for public comments.

However, even before the final recommendations are out, experts say the report could turn out to be only of academic interest like many similar reports preceding it.
R H Patil, chairman, Clearing Corporation of India and non-executive chairman of National Securities and Depositories Ltd, is a veteran of such reports, having being a part of many committees in his 30- plus years in the Indian financial sector.

However, having gone through the key  points of the most recent report on the financial sector in India, Patil doesn’t think the report stands a chance when it comes to implementation.

“It can be described as an idealistic report and it is not practically possible to implement. It is based on privatising top nationalised banks which is not possible and since most of the report is based on this, the other recommendations also fall flat,” said Patil, who in 2005 chaired a similar committee to revive the lagging domestic corporate bonds and securitisation market in India.

Patil said that his experience shows that it is futile to write a report which cannot be implemented: “Anybody writing a report should consider whether its main points can be implemented. If a report is expected to be out rightly rejected, then there is no point in spending so much effort in writing it.”

Patil pointed out to the panel’s proposal of opening up the rupee market which is not possible in the local context. “The committee recommends opening up the exchange rate domestically, but if the rupee rises to Rs 30 per $1 the domestic industry will collapse,” he said.

Bankers are already discounting whether these proposals would be implemented. “I have not gone through the report, but ultimately these are proposals and I may not agree with them,” a head of a large public sector bank told DNA Money.

Perhaps, even chairman Raghuram Rajan had anticipated the difficulties in implementing this report. In his acknowledgments in the initial pages of the report, Rajan confesses that he was “intrigued and puzzled” on why there was a need for another report on next generation financial sector reforms, after so many related reports in the recent past.

However, he says, planning commission deputy Montek Singh Ahluwalia convinced him of the merit in taking an overall view.

“The purpose of the report would be to catalyse debate as well as action,” Rajan wrote, adding: “Some immediate and some over time as political will emerged.”

r_joel@dnaindia.net
Proposals of the committee on financial sector reform
RBI should formally have a single objective, to stay close to a low inflation number in the medium term and use only repo and reverse repo rates to achieve it

Steadily open up investment in the rupee corporate and government markets to foreign investors

Allow more entry to private small finance banks. Offset their risk from being geographically focused by requiring higher capital adequacy norms

Liberalise banking regulation so that local agents can serve to extend financial services

Offer tradable certificates to entities that lend to eligible categories in the priority sector. Let banks that undershoot their targets buy these for submission as fulfilment of their target

Liberalise the interest rate that institutions can charge

Sell small underperforming public sector banks

Create stronger boards for large public sector banks, devolve to them the power to appoint and compensate top executives

After strengthening boards, delink the banks from additional government oversight, including by Parliament

Be more liberal in allowing takeovers and mergers, including by domestic subsidiaries of foreign banks

Free banks to set up branches and ATMs anywhere

Allow holding company structures, with a parent holding company owning regulated subsidiaries

Bring all regulation of trading under the Securities and Exchange Board of India (Sebi)

Encourage introduction of markets such as exchange traded interest rate and exchange rate derivatives

Stop creating investor uncertainty by banning markets. To curb manipulation, take direct action against suspects

Create one consolidated membership of an exchange for qualified investors 

Encourage “professional” markets where sophisticated investors can trade sophisticated products

Create a more innovation-friendly environment, speeding up process of product approval

Allow greater participation of foreign investors in domestic markets

Rewrite financial sector regulation, with only clear objectives and regulatory principles outlined

Set a specific remit for each regulator every five years and make each regulator report progress every year to a parliamentary standing committee

Regulatory actions should be subject to appeal to a tribunal, which will be set up along the lines of, and subsume, the Securities Appellate Tribunal

Supervision of all deposit taking institutions must come under the RBI, with no sharing of responsibility

Let ministry of corporate affairs review accounts of unlisted companies, while Sebi reviews those of listed companies

Set up a Financial Sector Oversight Agency to monitor the functioning of large, systemically important, financial conglomerates

Set up Financial Development Council to assess macro-risk and developmental issues

Set up an Office of the Financial Ombudsman, incorporating all such offices in existing regulators, to serve as an interface between the household and industry.

Let the Deposit Insurance and Credit Guarantee Corp both monitor risk and resolve a failing bank

Create a unique national ID number with biometric identification ASAP

Institutionalise credit information and make banks pay for it

Increase land registration and titling efforts

Re-examine restrictions on tenancy so that it can be formalised in contracts

Extend powers of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Srfaesi) to all institutional lenders

Encourage the entry of more ARCs, including ones with foreign backing

Clear up bankruptcy law, keeping in mind the recommendations of the Irani Committee