[Finance and Mangement] Chapter 1 Regulators Regulators o f Banks and Financial Financial Institut ions
The financial system in India is regulated by independent regulators in the field of banking, insur ance, capital market, commo diti es market, and pension pension fund s.
However, Government of
India plays a significant role in controlling the financial system in India and influences the roles of such regulator s at least least to so me extent. extent.
The foll owing are five major financial regulatory bodi es in IndiaIndia(A) Statutor Statutor y Bodies vi a parliamentary enactments: enactments: 1.
Reserve Re serve Bank of Indi a : Reserve Bank of India is the apex monetary Institution of India. It is also called as the central central bank of th e country. The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve the Reserve Bank of India Act, 1934. The 1934. The Central Central Offi ce of t he Reserve Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Ce ntral Office is where the Governor sits and where poli cies are are formulated.
Though
originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. It acts as the apex monetary authority of the country. The Central Office is where the Governor sits and is where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
The preamble of the reserve bank of India is as foll ows:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country t o its adva advantage ntage." ." The RBI RBI regulates and and sup ervises the major part o f th e financial system. Regulators Re gulators
Regulated Re gulated entities
RBI
Commercial banks, urban co-operative banks, some
financial
and
non-financial
institution
(NBFCs) NABARD
Regional Re gional Rural Banks and the co-operative banks
National Na tional Housing bank (NH (NHB) B)
Housing finance companies
Department of company affairs ,GOI
Regulates deposit taking activiti es of corpor ate, other t han NBFCs
2.
Securit ies and Exchange Board of India: SEBI Act , 1992: Securit ies and Exchange Board of Indi a (SEBI) was first established in the year 1988 as a non-statuto ry body for r egulating the securities market. It became an autonomous bo dy in 1992 and more pow ers were given through an ordinance. Since then it regulates the market through its independent powers.
3.
Insurance Regulatory and Development Au thori ty : The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India and is based in Hyderabad (Andhra Pradesh). It was formed by an Ac t of Ind ian Parl iam ent kn ow n as IRDA Ac t 1999, wh ic h was amen ded in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance indust ry and for matters connected therewith or i ncidental thereto."
(B) Part of the Ministr ies of the Government of India: 4.
Forward Market Commiss ion India (FMC): Forward Markets Commiss ion (FMC) headquartered at Mumbai, is a regulatory autho rit y whic h is overseen by the Ministr y of Consumer Affairs, Food and Public Dist ribut ion, Govt. of India. It is a statutory b ody set up i n 1953 under th e Forward Contr acts (Regulation ) Act, 1952 This Commission allow s commodi ty trading in 22 exchanges in India, out of whi ch three are national l evel.
Note: recently FMC is merged with SEBI. (The Securities and Exchange Board of India (Sebi) was set up in 1988 as a non-statutory body for regulating the securities markets, while it became an autono mous b ody in 1992 with ful ly independent powers. FMC, on the other hand, has been regulating commo diti es markets since 1953, but lack of p owers has led to wild fluctuations and alleged irregularities remaining untamed in this market segment. ) here with the autonomous SEBI taking over, it ushers in hope for commodities derivatives markets to not only being revived, but drawing in more participants into these markets over the next few years.
5.
PFRDA under the Finance Ministry: Pension
Fund
Regulatory
and
Development
Authority: PFRDA
was
established
rd
by Government of India on 23 August, 2003. The Government has, thro ugh an executive th
order dated 10 October 2003, mandated PFRDA to act as a regul ator f or t he pension sector. The mandate of PFRDA is development and regulation of pensio n sector i n India.
Salient f eatures of the present regulations: At pr esen t, fi nan ci al reg ul ati on in Ind ia is or ient ed to war ds pr od uc t reg ul ati on i.e. each pr od uc t is separately regulated. For example, fixed deposits and other banking products are regulated by RBI. Small Saving Products by GOI, mutual funds and equity markets by the SEBI, insurance by IRDA and new pension scheme (NPS) by PFRDA. All the4se regulators have a key mandate to protect the interests of customers- these may be investors, policy holders, or pension fund subscribers, depending on the product.
The statutory obj ectives of the regulatory bodi es of financial institut ions i nclude the following: Market confidence: Sustaining confidence in the f inancial markets is one of the most important objectives of the financial regulatory bodies Consumer protection : Ensuring the most suitable level of customer protection Public awareness : Encouraging public awareness about the financial market through imparting educational programs Eliminating f inancial cri me: The financial regulations are designed for the purpose of reducing financial crimes and frauds
The regulatory principles that are followed by the regulators of financial institutions include the following: Role of management : Regulatory measures on the senior management of the fin ancial institutions so that they do not take decisions that are detrimental to the financial market
Innovation : Innovation should be facilitated with restriction so that the financial products and services launched are compliant to the rules and regulations International aspects : Strict monitoring should be there to see whether the international standards are maintained or not Efficiency and economy : The financial resources of a country should be used in the most prudent and effective way Proportionality: The financial regulations that are imposed should be proportional to the advantages that are anticipated from the regulations Competition: There should be strict supervision on the financial market for the purpose of m inimizing harmful effects of competition.