Sunday, April 06, 2008

Make it 100 "Big" steps, Dr.Rajan !

So, Planning Commission's Committee on Financial Sector Reforms Chaired by Dr.Raghuram Rajan is out with its report for comments. Looks like it suggests a primary shift in focus. Instead of mouthing cliches like Bank privatization, Capital account convertibility and priority sector norms that usually make a lot of noise and end up in a whimper, it gets down to micro issues like easing restrictions to open up bond markets for foreigners, tradeable warehousing receipts to collateralize farm credit, securitization of SME receivables and the like.

I see opposition from traditionalists citing meltdown in the US debt markets. They will argue that India has been pretty much resilient because we never had liberal bond markets. As usual, wrong reading of the situation that misses the point - the crisis have been in high yield mortgage paper or subprime (junk) bonds where regulation was lax ; the US equity, treasury and corporate debt markets, despite being close to the epicentre of the crisis, have remained far more resilient than markets in faraway countries.

Liquidity is the key, there is no denying that. Here India has a lot of ground to cover. NBFCs today pass on the credit/ default risk to Banks and Financial Institutions indirectly because they are not allowed a free play by themselves in certain areas (IPO financing, CLO, factoring, hedging etc.). So why not let these risks be absorbed by investors in NBFCs rather than by their creditors/benefactors? That will be an additional line of credit, a far better way to channelise savings to productive avenues instead of locking them up in time deposits.
The Government and the RBI should quit micro managing investment decisions – exposure norms of Banks, Provident Funds, Superannuation funds and other statutory collections that are now forced to invest in very low yield T-bills or AAA paper. Worse, they manage even PSU bank pay scales! Put in place regulations that ensure a close watch over ROI, encourage “stop loss” culture. Aberrations may occur, but in the long run, focus on optimal returns take the load off the back of government itself, when it’s time to pay back. In that, the government does a great service to itself, in whittling away all that contributes to the escalation of our budget deficits.

Who ever said conservative markets and regulatory caps on participation guarantee protection from risks? In fact, they go to cap rewards than containing risks. Try ceding control and stick with selective yet effective macro regulation for a change. Let RBI target inflation, not exchange rates. It’s an illusion to believe the world can regulate its way out of crises.

I would welcome Dr.Rajan’s 100 small, sorry, Big steps. Indeed in gathering political will and scale of execution, it is bigger still.

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