Regulations in the financial sector need to keep evolving as the market grows in depth, breadth and complexity. Think of this as the need for road rules and a traffic management system in a large metro—what worked 30 years ago cannot work today. It was possible to travel 5 km in Delhi without running into traffic lights or traffic cops 30 years ago as road traffic was thin. A malfunctioning traffic light today causes hours of traffic jams. As the traffic volume rises, cities resort to one-way traffic rules, higher parking fees and other measures to curb traffic in the city centre. Financial markets are similar; regulations need to keep moving to keep pace with the changing face of the market. Has the market changed? Yes, the size of the assets under management by the three large parts of the retail financial market—mutual funds (only retail), life insurance and the National Pension System (NPS)—crossed Rs34 trillion in FY 2017, up from Rs22 trillion just 3 years ago. Both the volume of money and the number of people on-boarding these products has risen sharply over the past few years. The share of household savings in financial products has been rising and now more than one-third of household savings find their way into financial products. In addition to the urban users of these products, a new category of investors are getting added through the Jan Dhan accounts. These are people who will be first-time users of many financial products as they move from cash, gold and real estate.
The debate around the Financial Resolution and Deposit Insurance (FRDI) Bill is good news. The citizens of a country must engage with a potential law that affects their money. I wrote on the issue last week, where I argued that the FRDI Bill proposes an early warning system for crisis in financial firms. You can read it here. Based on their financials, banks and other financial firms will be classified according to their risk. When the risk becomes more than moderate, a set of data reporting protocols kick into place, giving the system ample time to prevent the bank (and other financial firms) from failing. If it indeed does fail, there is a process-driven system for mergers and take-overs. It is only when all of this fails that a bank goes into liquidation. It is like getting a warning 10 miles before the train hurtles towards a cliff.
When you move a system from personality-based solutions to rule of law, there is a painful period of readjustment of the old way of doing things to the new. People, institutions and analysts all need to readjust to the new reality. The recent commentary around the Financial Resolution and Deposit Insurance (FRDI) Bill that is up for debate in the winter session of the Indian Parliament has picked up on one section (section 52) of the Bill, ignoring everything else in the 125 pages, and has resulted in panic about the safety of bank deposits if this bill gets passed. I read the Bill over the weekend and this is my understanding of what the aim of the Bill is and what it means for you.
Bank deposits are the one true friend of a middle class Indian and any threat to their safety is terribly upsetting. The government will introduce a new bill in Parliament in the winter session called the Financial Resolution and Deposit Insurance (FRDI) bill. One section of this bill is causing bank depositors to fear for the safety of their money. I read the bill over the weekend and this is my understanding of what the aim of the bill is and what it means for you.
At the 4th edition of the annual Mint Mutual Fund Conclave last week, the overarching theme was the question: should FY 2018 be called the year of the mutual fund? For an industry that just two years back was still calling itself ‘nascent’ 24 years after privatisation, it is a giant leap forward to have assets under management that have tripled in the last five years. Mutual fund assets are now one-fifth of bank deposits and almost two-thirds of the assets under management by the life insurance industry. G. Mahalingam, whole-time member of the Securities and Exchange Board of India (Sebi), in his keynote address, said that possibly the external factors that helped this growth, such as easy money policy overseas for the last few years and more recently, demonetisation, are coming to an end, and now the real mettle of the industry will be tested. He said that several regulatory measures that are coming in the days ahead will ensure that the industry is investor-friendly. One, the scheme merger announcement will be made soon by Sebi. Two, the work on the total expense ratio (TER) going down must begin. Third, investor-friendly disclosure measures such as using the total return index should be taken. “Good times are the best times to swallow bitter medicine,” he said.
If in the 1950s somebody wrote a future finance story about India, they may not have predicted the market that faces a retail consumer today. Till the 1990s, your savings and investing decisions were dependent on the government. No wonder Indian households chose gold and real estate as saving sumps. The financial sector was a reflection of the overall direction of the economy. Costs were high, service poor in state-owned and run finance. But post 1991, change came suddenly to finance and this column maps some of those changes as India celebrates 70 years of political and 26 years of economic freedom.
This would easily qualify as one of the worst moments of your life. That ping which says: your account debited with Rs30,000, and your current balance is now Rs2,467.20. Your blood chills and hands shake as you realise that you’ve been robbed—this is not a transaction you just made. Did I schedule a payment and forget about it? Did my spouse, who has my personal identification number (PIN), make a transaction? But I did not get a one-time password (OTP). You feel exactly the same way as you would, had somebody physically snatched your purse out of your hands. Robbery leaves the same feeling of disbelief and damage, whether it is virtual or not—the loss is very real.
While the loss you take home when cash is ripped out of your hand is yours, the responsibility is that of the bank when it happens in the virtual world. The banking regulator, Reserve Bank of India (RBI), has taken forward the draft it had released in August 2016 that thought through liability issues of electronic theft of money. The bank will now have to make good your entire loss if it happens through an unauthorized transaction or if the electronic theft happens due to a fault within the bank’s systems. You don’t even need to report this. For instance, when the data of nearly 3.2 million debit cards was compromised between May and July 2016, it was due to a virus in the systems of Hitachi Payment Services, the firm that manages the bank’s ATM network. In an event such as this, you do not have to report the loss of money, the bank will have to make good on it because its system failure caused the loss and many people are affected.