of competition as an instrument of efficiency to a secondary position. furthermore, co - ordination among the financial institutions took precedence over arms length relationships or checks and balances, thus introducing what may be called a joint - family approach to financial transactions, which undermined both the degree of transparency and the extent of accountability. the next question is, what constitutes regulation. regulation in its broadest sense includes establishing specific rules of behaviour, or regulatory aspect per se, monitoring or tracking observance of behaviour ; and supervision or oversight of the compliance with specific rules in the overall behaviour along with disincentives and penal provisions for non - compliance. there are some arguments in favour of formally separating the regulatory aspects from supervisory aspects but the current international practice favours the two functions being viewed together. in this presentation, the functions are not viewed differently, and the terms regulation and supervision are used interchangeably to cover all three functions, unless otherwise indicated. the reserve bank of india ( rbi ) is generally looked at inter alia through three angles, viz., ( i ) monetary authority ( ii ) regulatory authority ( iii ) supervisory authority. it is clearly possible to separate the monetary function from the other two though such a separation between regulation and supervision could pose problems. the impression that the supervisory function needs to be segregated from the regulatory responsibility has been reinforced by the recommendations of the narasimham committee ( 1998 ) to the effect that the supervisory function be removed from the central bank and be made autonomous. in operational terms, however, supervision is an integral part of the regulatory framework. in india, in some instances, regulation, monitoring and supervision are combined with business or commercial relationship as in the case of national bank for agriculture and development ( nabard ) or small industries development bank of india ( sidbi ). it is not uncommon to find such apex supervisory institutions competing or jointly financing with the institutions that they regulate and refinance some of them as in the case of state - level industrial corporations. thus developmental objectives are pursued jointly by national and state - level public - sector financial intermediaries, some of which, like industrial development bank of india ( idbi ) have private - shareholding also, and in the process, the distinction between regulator and participant in the business gets blurred. the objective of regulation may be institution based or function based or even product or market oriented. in other words, a regulator may regulate banks though banks may involve themselves in other activities such as being an intermediary in capital

terms of assurance of systemic stability and consumer protection, especially in terms of information availability in a timely and transparent manner particularly to retail customers. " public policy arrangements should never eliminate the incentive for consumers of financial services to exercise due care " ( charles goodhart, 1998 ). it is useful to refer to some operational aspects of financial regulation, which impinge on effectiveness of regulation. first, how much of regulation through supervisory arm should be externally imposed by regulator and how much should be left to market discipline so as to make the behaviour of the regulated unit consistent with regulators intent. second, whether intensity of regulation is such that it is considered to be the minimum with incentive for better behaviour by the regulated unit or is regulation such as to ensure mere compliance and no more. third, how much of regulation should be off - site and how much on - site. fourth, how much of regulation should be incentive based, which would include disincentives. fifth, how far do consultations with market participants help enhanced efficiency and when does such consultation end up as capture of regulator by the regulated. sixth, how much of findings of supervisory oversight be put in public domain and how much kept for communication between the regulator and the regulated. seventh, how much of the supervisory oversight should be strictly rule based and how much of judgment of overall compliance acceptable. briefly stated, the answer to all these questions lies in seeking and striking a right balance. these are several issues which need to be addressed irrespective of the structure of regulation. of particular relevance to indian conditions is the need to appreciate the difference between administering law or public welfare and regulation of financial entities and also not mixing up issues between the two roles. similarly, process of deregulation or rationalization of regulation should not imply dilution in supervision and, in fact, should be complemented by close monitoring and effective supervision, especially adequate and timely penal action as appropriate. finally an optimal regulatory framework ensures both autonomy and accountability of the regulator. to ensure these, regulatory objectives need to be spelt out clearly and full operational freedom granted to achieve the objectives through exercise of powers granted to the regulator over the regulated entities. at the same time, the regulators should be as transparent as possible and fully accountable. accountability should no doubt be with reference to overall objectives and effectiveness. if individual actions of a regulator are subjected to external scrutiny, there may be a preference for regulatory inaction, just as, if individual case of inaction is subjected to such a scrutiny,