Rising banking regulations over the past decade have shifted market activity to less-regulated shadow lenders not just in India but across the globe, according to a concept paper by principal economic advisor in the finance ministry Sanjeev Sanyal, released on Thursday.
The paper, therefore, pitched for a combination of simple but effective regulations and greater supervision as a necessary tool for a more vibrant financial system both in India and abroad.
Asked about the $2.2-billion scandal at Punjab National Bank, perpetrated by jewellers Nirav Modi and Mehul Choksi, Sanyal said even higher regulations wouldn’t have prevented the crisis while more effective supervision might have.
According to the Financial Stability Board, after having shrunk following the global financial crisis, the size of the non-bank financial intemediation sector globally has almost doubled from $2.3 trillion in 2010 to $50.9 in 2018. In India, the share of non-bank financial intermediaries in total financial assets rose from roughly 10.5% in 2006 to over 14.5% in 2018.
“…increasing regulation in one part of the financial system has shifted risks to the less-regulated, less transparent part of the financial system,” it said. The paper was released by chief economic advisor Krishnamurthy V Subramanian.
Making a clear distinction between uncertainties and risks, it warns against the folly of employing the same policy prescriptions to adress both.
Similarly, the paper highlighted that regulation often becomes the default response of policy-makers to a crisis. However, under uncertain conditions, it’s difficult to create regulations. “It would be far better, therefore, to have a simpler regulatory frameworksupplemented by active and efficient supervision,” the paper says.