Subir Gokarn: Perspectives on financial sector strategy
Keynote address by Dr Subir Gokarn, Deputy Governor of the Reserve Bank of India, at the
High Level Panel on Opportunities and Challenges for Financial Services in India and
Europe, New Delhi, 20 September 2010.
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The inputs of B.M. Misra, Pallavi Chavan and Rakhe P.B. in preparation of this address are gratefully
acknowledged.
I welcome this initiative by the Asia-Europe Business Forum to organize a discussion on
opportunities and challenges for financial services in our respective regions. Virtually all
significant debate that is taking place today on financial sector regulation and development,
whether in advanced or emerging economies, is placed in the context of the crisis and the
role that the financial sector played in it. However, there is a significant asymmetry in that
debate, as is evidenced, for example, in the discussions on post-crisis financial regulatory
strategies in the G20 process. It is by now fairly clear that significant differences in regulatory
frameworks across countries contributed to very different outcomes in terms of both the role
of national financial sectors in the crisis and, in turn, the impact of the crisis on the financial
sectors themselves. Within the G20 process, this has resulted in concerns about a
"one-sizefits-all" regulatory response to the crisis. However, on a more constructive note, it has also
contributed to the emergence of a collective view on balancing the role of the financial sector
in the development process with the need for global co-ordination on regulation in the face of
increasing global integration of both financial systems and economies as a whole. This
"emerging market perspective" was the subject of a seminar organized in Seoul as a prelude
to the recent G20 Finance Deputies meeting in Gwangju, Korea, earlier this month. I believe
that this perspective provides an important foundation for sustaining a meaningful dialogue
between advanced and emerging economies, of which this forum is an example.
In this brief keynote address, I would like to put forward some thoughts on the broad
principles that guide our thinking on financial sector development and which have shaped our
contributions to the "emerging market perspective" that I referred to earlier. On previous
occasions, I have articulated four basic principles: efficiency, stability, transparency and
inclusion. An effective strategy would need to balance the objectives implicit in the four
principles by, first, exploiting the complementarities between them and second, recognizing
the tradeoffs and, wherever they arise, prioritizing between objectives. Let me elaborate on
the "opportunities" and "challenges" provided by each set of objectives.
As regards efficiency, there is little doubt that the financial system needs to meet the
expanding and increasingly complex requirements of a rapidly growing economy; more so, it
needs to meet them in as cost-effective a manner as possible. Given the imperatives of
speed, a number of factors can be brought to bear on this. New capacity combined with
greater competition is clearly one way to achieve this objective. New ways of addressing
specific needs, for example, through the development of new markets and new products is
another. However, it is important to recognize that the efficiency of the financial system
cannot be viewed in isolation. There must be a concrete link between the development of the
economy and the capacity and the capability of the financial system.
Clearly, as we think about rapid increases in both capacity and capability, the role of foreign
institutions needs to be considered with reference to their ability to bring both capital and
knowledge to the table. However, the benefits that greater foreign participation may generate
have to be balanced against their potential to increase risks. This brings us directly to the
second principle, stability. Financial stability, explicitly or implicitly, has always been an
objective of both governments and central banks and this was quite vividly demonstrated in
the response to the crisis on 2008. Since then, what was perhaps more implicit than explicit
is now sought to be formalized and institutionalized in many countries, including India. The
mechanisms needed to both pre-empt and deal with systemic risks and their materialization
are being seriously debated. From a broad emerging market perspective, the question of
how the significant presence of large foreign players contributes to systemic risk is a critical
one as regulatory and prudential strategies are designed in the post-crisis environment. How
do we exploit the benefits that they offer with respect to the broad developmental objectives
without making our own systems vulnerable to shocks that emanate outside and over whose
transmission we have little or no control? A balance needs to be maintained between
ownership, governance and prudential norms that satisfy reasonable systemic safety
requirements and commercial viability, which will make it worthwhile for these institutions to
expand or set up business.
I would like to emphasize that the stability principle is not confined exclusively to foreign
presence. Systemic risks can originate in domestic financial players as well. An effective
safeguard mechanism must identify all possible sources of such risks and put in place
appropriate measures.
Transparency is a critical requirement of a globally integrating financial system.
Standardizing and harmonizing reporting norms will help to bring about global comparability,
which, in turn, will help national regulators identify the vulnerabilities of their systems and
take necessary steps to prevent the precipitation of a crisis. However, while this is a
desirable objective, the process of convergence is itself resource and knowledge intensive.
Cross-border comparability will remain a problem as different countries converge gradually to
the global standards. Even after it happens, mechanisms that ensure the full dissemination of
information need to be instituted or strengthened to derive the full benefits of comparability.
Finally, on the issue of inclusion, this is clearly an objective at the core of the larger
development agenda. It is not easy, even for people within the system, to appreciate the
sheer scale of the challenge. It is not just a question of numbers. The imperative is to provide
financial access to several hundred million people in widely differing local environments in
terms of levels of affluence, economic structures and means of livelihood, risks emanating
from both natural and man-made sources and infrastructure conditions. This requires a deep
understanding of the local terrain and the organizational ability to find cost-effective ways to
cater to the requirements of financial services in each terrain.
There are, of course, some universal or replicable components, which are either already in
play or will become so shortly. Saturation coverage by the telecommunication network allows
the use of low-cost wireless handheld devices to actually play the role of a bank branch,
significantly reducing the cost of expansion. The impending introduction of the Unique
Identification Number will significantly improve the efficiency of the KYC process as well as
allowing full mobility across the networks of individual banks. But, given the overall scale of
the challenge, as well as its regional diversity, properly visualizing the role of different
participants and coordinating their activities will be of critical importance. And all this will have
to be done with full consideration of cost-effectiveness, commercial viability and, of course,
the implications of any strategy for financial stability. In short, robust development of our
financial sector in a manner consistent with the larger goals of economic development needs
to balance these four principles. It needs to exploit complementarities and manage tradeoffs.
Let me list three current areas of activity, which reflect this overall approach.
First, the process of issuing new banking licenses has begun, with the articulation of core
issues and the pros and cons associated with ownership and capital criteria. A public debate
and consultation process is now under way. Second, an effort to co-ordinate action on the
remaining barriers to the development of the bond market is in motion. A very important
motivation for this is the sharp rise in infrastructure spending and the need to ensure that this
is not hindered by financial constraints. Third, a process of consultation with individual banks
with the objective of developing realistic financial inclusion plans is going on.
I will conclude by highlighting three balancing acts that our financial sector development
strategy needs to perform:
1. Between the drivers of financial sector growth and the requirements of the larger
growth and development agenda
2. Between the benefits and risks of greater global integration
3. Between the advantages of scale and the compulsions of diversity
I trust that these thoughts will be a useful input into the discussions that follow and I thank
the organizers of this Panel for the opportunity to share them with you.