R A

Dear Sir,
Draft Report of Committee on Financial Sector Reforms (CFSR) provides a comprehensive and valuable basis for debate on various structural issues relating with Indian Financial Sector.
As mentioned in 'Acknowledgements' by Dr. Raghuram G. Rajan (Chairman), report outlines an overall view, highlighting the links between various needed reforms, and offers many insightful approach for evolution of Indian Financial Sector in coming years.
Guided by the analytical discussion presented in the report, I take opportunity to share some of my observations on topical issues, which may be relevant to effective functioning of specific areas of Indian financial sector.

1. Market Infrastructure and Regulatory Framework
The report has highlighted on increased costs and operational overheads, reduced market efficiency and liquidity resulted from segmentation of financial markets. It has also emphasised on the constraints of regulatory architecture operating in 'silo model'.
On the market infrastructure front, apart from trading in financial instruments (equity/bond/ interest rate/currency/derivatives) and commodities, market has recently witnessed new announcements about development of Power Exchanges and trading in Certified Emission reduction (CER)/ Carbon Contracts.
Regulatory supervision of power trading exchanges is vested with Central Electricity Regulatory Commission (CERC). Subsequent to issuance of guidelines for setting up of Power Exchange by CERC in February 2007, there are announcements about 3 operator groups planning to launch different platform for trading in electricity.
Recently launched trading on CER on commodity exchanges follows completely different transaction life cycle than typical commodities. India being the net seller of CER to international buyers, sound regulatory framework on trading, clearing and settlement aspects needs to be established. It is to be noted that National CDM Authority in India presently conducts review of project proposals and issuance of CER credits. However, to provide a comprehensive framework on these aspects, a close coordination between FMC and CDMA would be needed.
While characteristics of market participants in trading of these products would be completely different than participants in financial markets, from integrated market infrastructure and regulatory framework perspective, these aspects may require closer assessment.

2. Financial Literacy as a key tool to Financial Inclusion
Report in respective sections has highlighted on the significance of Financial Literacy as a key tool to Financial Inclusion of vulnerable sections. Proposal for an integrated ombudsman to enhance financial literacy and financial counselling is much-required step to fulfil challenging requirements.
It has been observed that many initiatives by SEBI, RBI, DCA, individual banks and other institutions have been initiated in recent years. However, these are greatly fragmented, targeted on narrow focused subjects with less effective delivery tools. Delivered mostly in the form of meeting checklist criteria, outcome of these initiatives on the ground does not present highly encouraging picture.
Proposal on a single institution with a mandate to propagate comprehensive education on financial matters (Household savings and budgeting, Retail banking, Insurance, Securities market, Housing Loan, Credit Card, Investment products, Pension and Retirement security) would be highly effective step in achieving the desired goals of universal financial literacy. Funded with investor protection fund/ government grants, the institution would carry-out structured literacy program, workshop, seminar and survey through formal/informal delivery channels across the country.

3. Identity Infrastructure
While several ongoing initiatives on Identity has been discussed in the report, with increasingly growing volume of internet banking, internet trading and other form of e-commerce transactions, it would be imperative to consider development of common identity authentication infrastructure supported by the government and industry.
Amongst the many available options, Biometrics unquestionably provides highly secured and robust credential to establish identify and validation needed for financial transactions. However, challenge associated with biometrics is that it would require establishment of central shared repository of biometrics samples with common standards of industry wide applications and interoperable algorithm/ templates.
To meet higher costs involved, it would require a high level of collaboration between government and industry to develop on common Identity authentication infrastructure on cost sharing basis. Delivered from single infrastructure, it would serve the dual purpose – of supporting many of governmental identity requirements as well as basis of authentication in financial transactions.
Considering huge challenges of Identity Management afflicting the financial sector, more particularly with rising incidences of identity theft and phising, suitable policy enforcement by government and industry initiatives to develop a shared identity infrastructure would be a logical step.

4. Financial Intelligence
Financial Intelligence Unit has been set-up under Department of Revenue (Ministry of Finance) in 2004. Apart from receiving, processing, analyzing and disseminating information on suspected financial transactions, it is responsible for coordinating strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes.
It is noted that much of the focus of Financial Intelligence at present remains around Anti-Money laundering and Combating Financing of Terrorism. Most of the systemic frauds, scams and white-collar crimes in financial sector remain mostly out of purview from any effective preventive surveillance.
As per recently published India Fraud Survey Report 2008 by KPMG, Financial services sector was considered relatively more susceptible to fraud followed by real estate/infrastructure and IT/ITes.
Without much emphasis, such fraud activities cost much to business, regulators and government alike. Many times, ordinary people are defrauded of their hard earned money through organised mechanisation, which badly affects public confidence in overall effectiveness of governance of financial system.
It is necessary that suitable consideration is made on developing a framework to deal with aspects of fraud and white-collar crime in financial sector.

5. Promotion of Mutual Fund as preferred Investment Vehicle
As per 2007 Investment Company Fact Book published by Investment Company Institute (USA), nearly half of all U.S. households owned mutual funds in 2006. Individual investors and household investors with divergent financial goals hold around 87 percent of total mutual fund assets.
Unlike US, where mutual funds are considered as long-term investment vehicle by individual investors, the Indian mutual fund market is extremely short-term in nature with dominant presence of non-retail investors. As highlighted in Cadagon report on Mutual Fund reforms In India, "short term" can mean up to a couple of weeks, "medium term" up to six months and anything over six month can be construed as "long term".
Mutual fund industry should work primarily to provide investment vehicle to retail investors. However, this idea has been greatly diluted due to rampant abuses caused by AMC on the issues of fund governance, investment decision and operation. In order to maximize their management fees, AMC allows corporate to exploit larger benefits (at the expense of other investors) by making shot term investment in a given fund. Large presence of corporate investment with sudden withdrawals and investments many a times creates large instability not just for the involved funds but the industry as a whole. After losing the confidence in governance and operation of fund companies, retail investors shy away to further make any investment in mutual funds.
In this context, it would not be bad idea to bar short-term corporate investment in mutual fund companies altogether, which is primarily used for tax advantage/avoidance.
Many times, retail investor expects regulatory intervention simply for the reason that market conditions are falling or funds are underperforming. This further emphasises on importance of investor awareness and education in Indian situation about risks and challenges associated with a particular investment vehicle.

6. Regulator of Regulators
Proposal on Financial Sector Oversight Agency (FSOA) to develop a supervisory layer with a view to coordinate amongst regulators in the area of regulatory gap/overlap and functioning of large systematically important financial conglomerates, in principle presents an appropriate measure to achieve coordination on market-wide issues spanning across regulators.
However, despite its proclaimed intentions, it is likely to result into adding another layer of regulatory burden and in all possibility opportunities of intra-regulatory conflicts. Further, within the ambit of specific regulatory domain, identification of financial conglomerates may appear misleading unless specific regulated activities of any such conglomerate are considered and analyzed to draw the cross-market/systemic impacts.
The ideal option would be to minimize the regulatory gaps/ overlap by effectively rationalizing and enhancing the regulatory area under span of each involved regulator. Thus, each regulator would be able to take full responsibilities for area under its jurisdiction without much conflict and overlap.
To achieve coordination and information sharing amongst regulators on market wide issues, cooperation and communication at operational level requires to be greatly fostered. Further, idea of cross board membership as a mean to communication and coordination would certainly achieve a lot, without establishment of FSOA as an apex umbrella organization.
I trust, above observations brings some useful perspectives on the discussion. In case of any query/clarification, I would be glad to provide further information.

Thanking you,
Yours sincerely
IP C

Dear All,
The Committee has fully justified its set up by giving proposals which look ready to give the needed financial sector infrastructure to Indian Economy. With such a team to work, there was every expectation of getting the beast of suggestions, which has been met by the report.
It has been a pleasure in last few days to read the Draft report and to find that so many measures are though of to change the financial Sector Infrastructure in India to take it to desired levels.
In particular, the chapter 3 - Broadening Access to Finance containing proposals 3-6 seems particularly useful.
Below are few of the concerns that I have in the report and I hope the same would prove useful to you.

Comment I – PSLC Mechanism
Proposal 5 regarding Priority Sector Lending Certificates (PSLC) drew special attention as it allows the most efficient lender provides loans to Poor and also banks finds a way to cheaply fulfills their norms at much lesser cost and Banks can also give more attention to their preferred businesses.
However, the scheme of PSLC would require a discussion on the Implementation Mechanism.
Following would be required to be answered among other topics:
1. Who is going to regulate the market in Which PSLC would be traded?
2. Can the original Lender charge Premium on selling the PSLC, specially keeping in mind that original lender can not transfer the risk?
3. What additional incentive can be provided to Original Lender to encourage him to impart more loans in Priority Sector since the risk is not transferred and Priority sector would have higher risk. This is also recognized by the report on Page 3 of Chapter 3 - Broadening access to finance where in it is written that "The higher Fixed cost and higher perceived credit risk associated with small loans imply lender needs higher, not lower, interest rates to meet demand"".
4. Is there going to be Prior agreement between the buyer and seller of PSLC. Otherwise following may happen - Original Lender may impart more loans in Priority sector being of the opinion that he will be able to sell his PSLC to other banks and other banks may also be able to meet their Priority Sector Lending Targets with their own efforts and therefore no one might buy the PSLC from Original lender resulting in majority of his lending to the Priority sector.
5. How often would the trade take place since The primary lender, after lending the amount to Priority Sector, would like the sell the certificates as soon as possible.

I am sure that other such issues would come up in due course of time and would be appropriately handled.

Comment II –Vulnerability reducing instruments
I also agree completely with what is given on Page 2 of Chapter 3 - Broadening access to finance that "Perhaps the most important financial services for the poor are vulnerability reducing instruments". But no Proposal has been given to reduce the Vulnerability of Poor's e.g. through allowing banks in rural areas to also provide such financial services (Crop Insurance, Health Insurance, Pension needs etc.) with out obtaining any further license for Insurance. (The same may be coordinated between relevant Governing bodies e.g. Reserve Bank of India, Insurance Regulatory and Development Authority etc.) or e.g. by drafting some Hybrid Instruments which serves the purpose of reducing Vulnerability etc.

It would be of great value to have a proposal on the above given matter.

Comment III –Review of Accounts by MCA / SEBI
It is also welcome to bring more and more financial institutions under regulations of RBI as is suggested by Proposal 23 under the chapter "Changes to Regulatory Architecture" as this is going to boost the overall efficiency of Regulations.

But the proposal 24 under the same Chapter concerning review of accounts by Ministry of Corporate affairs (MCA) of unlisted companies and review by SEBI of listed companies raises a little concern.
Since under Proposal 25 Financial Sector Oversight Agency (FSOA) has been proposed by the committee, would not it be possible to give FSOA the responsibility for the review of Financial Institutions and Companies. Also FSOA can share the results of such a review with Reserve Bank of India (RBI), since committee under Proposal 23 has it self proposed increased Supervisory Capacity of RBI.

Hope the above comments would be useful to enhance the effectiveness of the policy.
I give my best wishes to the Committee for its future endeavors and looking forward to more such great work.

Thanks and Best Regards
MV

Dear Sir,

The old adage is that "farmer lives poor and dies rich". Any credit program that doesn't actively associate itself in value-addition to the farm products and help him fetch better prices is bound to let down the farm even with repeated write off of loans. This is the crux of the failure of the nationalized commercial banks which cannot act beyond pure,banking role in accepting deposits and lend money and recover it fast keeping the onus of repayment always on the poor farmer.

Unless the Rajan committee tackles this fundamental difference between an industrialist and the farmer in its recommendations, the farmer will continue to move on between the commercial/cooperative banks and the moneylender, Those money lenders could be either a village money lender or a retail MNC promoting contract farming.

This fundamental weakness of II le farm sector - their ability to absorb capital and convert It into profit after discharging the debt obligation- was discussed :_at length by the Working Group on Agricultural Credit of the National Commission on Agriculture (NCA, 1974) and recommended a different cooperative framework between farmers and make it a partner with the farmer-members outside the shackles of the Banking Companies Act. Unfortunately, the RBI didn't like it and created the RRBs under their empire. After thirty years of their working, the same old etory continues arid the farmers have been reduced to a terminal stage of ending their lives. When will the government and the RBI learn ?

The Rajan Committee would do well to look into the NCA recommendations and the working group's report before they make any more recommendations on the subject of Farm Credit.

Yours sincerely,
N.V.R.

Dear Sir,

I glanced though the Report and in the section on DICGC information on premium payment needs to be updated. ‘DICGC does not distinguish between the soundness of different banks and charges a flat insurance premium of 0.05% for all Banks’.

This should read as ‘a flat insurance premium of 0.10 % ( revised since 1/4/2005, Annual report, DICGC 2006-07)web-site www.dicgc.org.in

R.K.