Government of India Volume I: Analysis and Recommendations

INTRODUCTION
The difficulty in addressing financial sector regulation on a holistic basis has given
rise to a rapidly growing shadow financial sector. This includes shadow banking and
other shadow financial service providers who collect huge amounts of money from the
public, particularly the retail investors, leading to fundamental concerns on consumer
protection and at times generating issues of financial stability and systemic risk. There
have been increased incidences of such entities operating between the regulatory boundaries
at their will, defrauding investors in the name of emus, plantations, and pyramid
formations. Unless issues of regulatory grey areas and governance are addressed early in
a systematic manner, all these issues are likely to aggravate in the future, given that innovations
on products, practices and organisational structures very often happen outside
regulatory boundaries.
The setting up of the FSDC and the formation of the Commission itself has been a clear
recognition of the limitations of the existing statutory and organisational arrangements.
While the FSDC as an apex council for regulatory co-ordination and financial sector development,
was an interim response, the Commission, mandated to rewrite and clean
up the financial sector legislations and architecture, was to provide the long-term institutional
answer to the problems haunting the current institutional ethos of the financial
sector. This is what has been attempted in this report.
1.5.3. Financial inclusion and literacy
Financial inclusion is a major policy objective that India has been trying to achieve over
the years. The Commission has noted that inclusion, even in terms of basic banking accounts,
has reached only about half the population; in terms of financial instruments
such as insurance and securities, inclusion is far limited. Though the level of inclusion
should depend on the type of financial products, financial services, such as basic banking
and pure insurance products, should reach almost all; other products, enabling risk management
and income generation, should reach a sizeable population so that the benefits
of modern finance are available to a large part of the population.
The Commission debated issues emanating from mandated development and financial
inclusion as a regulatory responsibility. While expert opinion is divided on the subject,
the underlying line of thinking has been that regulatory mandating has to be avoided
because the regulatory approach should be to provide an enabling framework wherein
service providers would be able to use innovative approaches, including usage of modern
technologies, in achieving the desired macro objectives. Moreover, micro-level targeting
and licencing approaches may be too slow in achieving this objective.
1.5.4. Financial globalisation and lessons from the crisis
No major economy in the world today can be viewed in isolation from the rest of the
world. Given the size and the growing magnitude of interaction – in terms of trade, services,
and capital flows – and the greater openness to globalisation, India is in a different
economic milieu today than it was two decades ago. India is virtually part of the world of
globalised finance and is learning to walk, negotiating the strong currents both positive
and negative, generated by the forces of financial globalisation.
Negative aspects of financial globalisation and run away innovations in certain parts
of the world resulted in the global financial crisis of 2008. The world has learnt a number
of lessons from this crisis. The Commission, through its research, interactions with regulatory
authorities and experts from different parts of the world, and through India’s own
experience during the crisis, has understood the need for a carefully calibrated regulatory
approach to address the limitations of the market, particularly its tendency to travel too
fast and become too complex, both in terms of product and organisational innovations.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 7