30 years of reform. Report card of the Indian financial sector

This article is part of the series 30 Years After: Review and Renew the Reforms Agenda.

Photo by Lucky Trips on Pexels.com

At the heart of the complex web of bits and bytes that is the modern financial system is the ability to exchange and transfer capital (money) between various participants in an economy. Borrowers, lenders, investors and entrepreneurs form the four corners of this very busy square. Traffic flow and participants can either be controlled and owned by the government as it was in India till 1991, or it can be regulated by a set of independent regulators appointed by the government, as it is today in 2021.

When we see the hectic activity in the Indian financial system today, we tend to forget what it was like just 30 years ago — in terms of scale, products, efficiency, cost and service. The sole job of a financial system is to trundle money around to find its optimal use in terms of returns at a low-cost and safety of transactions. But the centrally planned Indian economy used the state-owned financial institutions such as banks and insurance companies to gather household savings for its own use, hard coding this into the reserve ratios in banks and investment guidelines in insurance firms.

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The country must retain its inflation target of 4%

The Reserve Bank of India (RBI) working paper by Harendra Kumar Behera and RBI deputy governor Michael Debabrata Patra on inflation targeting has waded right into one of the world’s most vibrant policy debates, one between inflation hawks and dis-inflationists. The former believe that easy-money policies pursued after the West’s financial crisis of 2008-09 that have given way to printing money as a path out of the covid crunch will eventually lead to much higher rates of inflation than experienced by the developed world in the last three decades. On the other side are dis-inflationists who believe that the world has undergone a structural change—thanks to demography, technology and globalization—that has caused the ‘Phillips Curve’ to flatten in some economies. By this, they mean that a long-observed trade-off between growth and inflation, under which an accelerative economy would overheat after a ‘speed limit’, has lost its disruptive power. The US Federal Reserve has recently loosened its rules a bit on fighting inflation, but there is no reason for RBI to follow suit.

In their paper, Patra and Behera set out to identify an appropriate inflation target for India, and find that it is still 4%, the central aim of an explicit policy adopted by RBI in 2016 that is due for a review in March. “If it ain’t broke,” they argue, “don’t fix it.” Yes. Take the pre-pandemic record. Retail inflation was in the range of 4.2% from 2014 to 2019, less than half the average over 2007-14. If India’s steady decline in inflation is consistent with a flattening of the Phillips Curve, the paper asks, what must be the right target at this point in time? A target set lower than the trend rate will result in an ‘overkill’ of tighter money that would hurt the economy, say the authors, while a higher aim will expose it to inflationary shocks. It would be best then to target 4%, as before, with elbow room of plus or minus 2 percentage points to give policymakers some flexibility.

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New rules are needed to stop predatory lending

2 min read. Updated: 22 Dec 2020, 08:35 PM ISTLivemint

The recent suicide of a Hyderabad-based techie who was humiliated when a lender went about calling people on his contact list, the consent for which he had given while taking that loan through an app, has brought into sharp focus the risks of instant app-based lending in India. The country has long been starved of credit, and despite efforts to drive up the efficiency levels of banks, our formal lending structure remains too clunky, time-consuming and costly to satisfy the vast demand in evidence for small unsecured instant loans. Online ventures spotted a big opportunity in this space and have gone all out to reach underserved customers. But this growth has been largely haphazard, while Indian regulators and lawmakers have tended to take only knee-jerk notice of creeping market failures that could end up destroying markets, choice and innovation. The unseemly tactics being used by lenders to recover their dues exemplify a failure that can no longer be ignored. We need much sharper regulation of all such practices.

In July 2020, the Reserve Bank of India (RBI) did put out rules designed to curb the opacity and violation of existing lending norms by digital lenders, but these have done little to improve matters on the ground, where lenders often ask for and get the digital records of borrowers that they have no right to. Clearly, RBI’s stated intent of viewing violations “seriously” has not been taken seriously enough by the market. This is not just India’s problem. Other countries are also taking steps to put rules in place for digital lending. In 2017, China’s regulators had to impose restrictions after a scandal arose of personal pictures being used to humiliate borrowers into repaying loans they could not afford to. In Kenya, its central bank has clamped down hard on predatory rates and recovery practices. India is in need of a policy solution that would neither kill this nascent market—which fulfils a very real need for quick and painless loans to tide people over for short periods—nor deaden the buzz of innovation in the country’s fintech sector, but is able to institute personal data and privacy protections that prevent predatory recovery practices.

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