Wednesday, December 21, 2011

Dr. C. Rangarajan's address in India Finance Conference 2011

Dr. C. Rangarajan inaugurated the India Finance Conference 2011 earlier today at IIMB. Dr. Rangarajan is currently the economic adviser to the Prime Minister. An eminent scholar, Dr. Rangarajan has been a professor at IIM-A and also been its director. He has been awarded with Padma Vibhushan and has served as the Governor of Andhra Pradesh.

In his inaugural speech, Dr Rangarajan addressed the gathering on the 3 topics of - Reforms, Regulation and Financial Innovation.

Talking about reforms he pointed out that the share of PSB's (public sector banks) in the Indian economy has gradually but substantially come down from over 90% in 1991 to about 72% in 2010. Private banks command a share of 10-12% and this seems likely to go up. Speaking about banking and finance sector reforms, he said there are many distinctive features that make Indian reform story unique, like - (a) Usage of domestic expertise (b) Banking reforms not driven by any crisis (c) Done along with other economic reforms (d) Creation of space for public & private along with domestic and foreign. He elaborated on the various transformational roles played by the Financial Intermediaries like risk, size and maturity transformations, and explained the challenges in the coming year. Dr. Rangarajan said that currently the Indian PSB's are under-capitalized and there was a need to infuse more capital into their systems. He pointed out that Indian banks are moving towards accepting new regulatory frameworks emerging across the world - the Basel II and III standards - and there was a need to do so.

Going on to regulations, Dr. Rangarajan pointed out that the current crisis in the west can be attributed to both the things - no regulation of certain financial activities and under-regulation of some. "Regulatory arbitrage" was created as funds moved from regulated to non-regulated parts of the market freely. Speaking of the need for regulations to cover all segments, he stressed that regulations be applied to uniform degree as well. He said that 'coordinated' oversight is required across geographies in the present crisis as well as going ahead. Dr. Rangarajan called for creation of institutions to build buffer in good times so that they can be used in bad times. Speaking about maintenance of good quality assets, he stressed that excessive leverage needs to be contained.

On Financial Innovation, Dr. Rangarajan brought to notice a recent report by Joseph Stiglitz Committee that says much of the innovation was helping only short-term profitability and was not the long-term. He called upon the FI's to keep in mind the social benefit/impact as they roll out new innovations. Saying that more study needs to be done to uncover risk taking and leveraging behavior, the FI's need to discourage excess use of either. Pointing out the need for an efficient debt market for corporate bonds to help liquidity needs as Indian markets mature, he extolled that there is a lot of room for innovations in the Indian context.

The three day conference at IIMB hosting many noted speakers from academia and industry promises to be great event for those interested in the Indian Financial system.

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