Your World of Legal Intelligence
 India | 1-800-335-6202

Financial Sector Legislative Reforms Committee Report (FSLRC)

Document Cited in Related
Vincent

Financial Sector Legislative Reforms Committee Report (FSLRC): What to do and when?

(Speech by Dr. Raghuram Rajan at the First State Bank 'Banking and Economic Conclave' held at Mumbai on June 17, 2014)

The Financial Sector Legislative Reforms Committee (FSLRC) Report is one of the most important, well researched, as well as well-publicized reports in Indian financial history. It not only lays out the functions of the financial sector and how it should be structured, but also how legislation and regulation governing it ought to look like. The authors of this report truly have to be commended for their national service. The report's influence will be felt for many years to come.

There is much to like and agree with in the report. In laying out the need for consumer protection, raising the issue of whether products sold are suitable for the target customer, and putting the onus on the financial institution to determine suitability, the report has forced regulators to review their consumer protection frameworks. We at the RBI are indeed engaged in such an exercise, informed by the valuable guidelines in the FSLRC report.

There is more of great value. The FSLRC's emphasis on the need for a clear monetary framework culminated in the Dr. Urjit Patel Committee report, which will guide our thinking in the years to come. Similarly, its focus on creating new institutions like the Financial Resolution Authority, which will help us resolve distressed financial institutions at minimum cost to the economy, is much needed.

I could go on. But I come here not to praise the FSLRC Report, but to debate some of it. I will argue that there are two fundamental areas of tension. One is the oversight of regulators. The FSLRC suggests laws that do not micromanage, giving regulators the freedom to fill in the details in consonance with the changing needs of the economy. At the same time, the FSLRC wants to check and balance the activities of regulators through judicial oversight. Too much of checks and balances could completely vitiate the flexibility afforded by rewriting laws. We need to find a proper balance, and the balance may vary with our level of development. I worry we have not thought through this fully.

The second area of tension is the appropriate size and scope of regulators. The FSLRC's recommendations seem somewhat schizophrenic here. On the one hand, it emphasizes synergies in bringing together some regulators into one entity. But in the process it suggests breaking up other regulators, with attendant loss of synergies. There is no discussion of the empirical magnitude of the synergies gained or synergies lost, which makes the recommendations seem faddish and impressionistic rather than based on deep analysis. Indeed, across the world, we see a variety of organizational structures in existence, suggesting that there is no one right structure. If so, there should be strong arguments for departing from the status quo, which the FSLRC does not provide.

Let me elaborate on these two issues.

The Logic for Regulation

The logic for regulation according to the FSLRC is to deal with market failure or, more colloquially, bad behaviour. The Commission talks about incomplete information or poor incentives as a reason for bad behaviour, but one of the most important reasons for the bad...

To continue reading

Request your trial
Navigation index

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT