Fixing the foundations
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Chit fund scams shine the light on the need to overhaul the financial regulatory architecture
Cases of semi-regulated or unregulated entities making unrealistic promises to consumers are roiling the financial landscape. It is high time the government sees the pattern and undertakes fundamental change. The search for a solution must factor in two realities. The first is the failure of the formal regulated financial system. The breakdown of present policy frameworks in finance has resulted in a stunted system. For most households, formal finance does not exist. Informal or unregulated or illegal finance has sprung up wherever there are gaps in access. Socialist policies in finance, supposedly in the name of the poor, have ended up depriving households of the access to finance and driven them into the arms of unregulated finance.
The second culprit is financial law. Existing laws do not clearly require regulators to identify and block malfeasance. In addition, the existing laws have set up an improbable mess of financial regulatory agencies where there is a lack of clarity about what must be done and by whom. The bureaucrats who run these agencies have the unenviable task of trying to work within a legal mess. They are busy squabbling, avoiding responsibility, defending or extending turf. Without accountability mechanisms, agencies like the RBI or SEBI or IRDA have no pressure to deliver results and are only focused on gaining powers and turf. The recent scandals prove that the present regulatory framework in which the RBI is expected to regulate non-banking financial companies has completely failed.
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