Government of India Volume I: Analysis and Recommendations

CHAPTER 10
Financial inclusion and market
development
In the framework proposed by the Commission, the focus is on regulatory functions,
which are meant to address market failures that impede efficient functioning of the financial
system. There are certain functions that are present in the existing legal and regulatory
framework that are not strictly regulatory in nature, and therefore remain to be
addressed. Specifically, these are functions that the state plays in (a) ensuring more equitable
distribution of financial services, and (b) in fostering the development or improvement
of market infrastructure and market processes. In this chapter, these problems are
discussed in terms of the objectives, powers to pursue objectives, principles to guide use
of powers, and institutional roles that should be enshrined in the the draft Code.
10.1. Objectives
Development concerns within Indian financial markets broadly involve two aspects: (i)
financial inclusion: initiatives where certain sectors, income or occupational categories
are the beneficiaries of redistribution of financial services, and (ii) market development:
fostering the development or improvement of market infrastructure or market process
(see Table 10.1).
Financial inclusion comprises certain interventions that impose costs on society as
a whole and yield gains to particular groups of citizens. Prominent and well-known initiatives
of this nature include restrictions on branch licensing, to require banks to open
branches in rural areas, and priority sector lending, to name some more widely known
initiatives in banking. Similar initiatives are there in other sectors as well.
Table of Recommendations 10.1 Development functions
The Code should provide for the objective of fostering the development or improvement of market infrastructure or
market process. This objective translates into the following:
1. Modernisation of market infrastructure or market process, particularly with regard to the adoption of new
technology;
2. Expanding consumer participation; and
3. Aligning market infrastructure or market process with international best practices.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 99