Financial regulations refer to a form of regulation or supervision of financial markets and institutions. Though financial regulations and its implementation have been among the key functions in any economy, It was only after the 2008 financial crisis where regulators took aggressive action towards regulating the financial markets in a more prudent manner. Governments around the world were authorized to make global markets safer by providing transparency of transactions in order to stabilize the financial system. One of the key purposes of establishing financial regulations is to maintain the integrity of the financial system.
We all depend on the financial system—from saving and accessing money, borrowing money to maintain business, taking out mortgage or insurance, to getting claims paid when something goes wrong. When a bank fails due to its inability to meet its obligation towards depositors or other creditors, the effect can spread to the wider economy.Financial regulations aim to enforce applicable laws, prosecute cases of market misconduct, license providers of financial services, protect clients, investigate complaints, and maintain confidence in the financial system.
The Challenge:The prospects for sustaining the global recovery that characterised the year 2021 on the back of unprecedented policy stimulus and rapid pace of vaccinations have been dimmed by the Russia-Ukraine war and synchronized and front-loaded monetary policy tightening in the face of surging global inflation. With persisting concerns about the near-term inflation outlook, amplified market volatility is raising financial stability risks. During these difficult times, higher capital and liquidity buffers have helped banks and financial institutions to remain resilient and stable. Nonetheless, fears of a hard landing have increased worldwide. For emerging market economies, these factors have translated into surges in capital outflows, sharp depreciation of exchange rates, loss of reserves and darkening macroeconomic prospects.
The global banking sector survived the pandemic shock well, gaining strength from capital buffers built since the Global Financial Crisis (GFC) and supported by various regulatory concessions to mitigate the impact of the pandemic. In the fast-changing global macroeconomic environment, fraught with geopolitical and pandemic-related concerns, however, the banking sector faces new challenges emanating from rising interest rates and the likely increase in debt servicing burdens. Credit demand—which is largely procyclical— is likely to remain subdued in response to the weakening economic outlook, with depressed treasury income, the likelihood of increasing delinquencies and dents to profitability.
(Source: Bank Lending Survey Q2: 2022-23, RBI)
Global regulatory priorities have shifted back to consolidation of the regulatory framework and protecting the financial system from the knock-on effects of an uncertain, volatile and hostile macroeconomic environment. Integrating climate risk into existing frameworks and mitigating the rising cyber risks are major areas of focus. Domestically, the emphasis is on improving the resilience of financial intermediaries, enhancing customer and investor protection, accelerating digitalisation, developing financial markets and strengthening the supervisory architecture. The Financial Stability and Development Council (FSDC) and its Sub-Committee remain steadfast in their commitment to develop a robust and efficient financial system for the Indian economy.
As the global economy transitions through a period of multiple shocks, regulatory efforts are refocusing on building up the resilience of the financial system. Specifically, global regulatory initiatives aim to address fragilities in non-bank financial intermediation and certain segments of financial markets, leveraged lending, cyber risks and crypto assets. Efforts are also on to integrate climate risk into regulatory frameworks. The following are major recent regulatory efforts made both internationally and in India to strengthen the stability and efficiency of the financial system.
- Recent Global Regulatory Developments and Assessments
Liquidity imbalances in bond market:In the light of dislocations in sovereign debt markets, the FSB(Financial Stability Board) examined the liquidity, structure, and resilience of core government bond markets and observed that changes in market structure have rendered these markets susceptible to liquidity imbalances during periods of stress. According to the FSB, dealers’ risk warehousing capacity to support intermediation is lower than the magnitude of trade flows, especially during times of stress, and non-bank liquidity sources do not seem to enhance market making. Elevated debt levels and increased usage of government bonds by some investors for trading, hedging and liquidity management strategies may have made some investors more susceptible to shocks. Central bank interventions, though effective in alleviating market strains, come with a price and should not replace market participants’ responsibilities towards managing their own risks. To improve market resilience, the FSB also suggests policy measures such as enhanced use of central clearing for cash and repo transactions and use of all-to-all (A2A) trading platforms to lessen the need for dealer intermediation.
Review of Margining Practices:Heightened market volatility experienced in March 2020 led to a spike in margin calls across the financial system, for both centrally and non-centrally cleared markets. There was significant dispersion in the size of increases in initial margins (IMs) across and within asset classes. Evidence suggests that transparency around IM models differs across CCPs(Centrally Cleared Markets) and jurisdictions. In this context, the BIS and the International Organisation of Securities Commissions (IOSCO) reviewed margining practices. and suggested areas for further policy work such as increasing transparency in centrally cleared markets through consistent metrics and disclosures concerning procyclicality. They also recommend improving disclosures about liquidity, identifying data gaps in regulatory reporting and streamlining variation margin (VM) processes in centrally and non-centrally cleared markets.
A CCP is an entity that interposes itself between the two counterparties in a financial transaction. After the parties have agreed to a trade, the CCP becomes the buyer to every seller and the seller to every buyer. In doing so, the CCP reduces counterparty credit and liquidity risk exposures through netting. It also provides standardised and transparent risk management.
Financial Reporting and Disclosure during Economic Uncertainty: In its statement on financial reporting and disclosure during economic uncertainty, the IOSCO (International Organization of Securities Commissions) has emphasised that auditors have the responsibility of establishing and maintaining effective internal controls over financial reporting, and providing transparent, entity-specific disclosures to investors about the current and future effects of economic uncertainty.
Enhancing the Resilience of Non-Bank Financial Intermediation: The FSB published a progress report on enhancing the resilience of non-bank financial intermediation (NBFI). This was aimed at assessing and addressing vulnerabilities in specific NBFI areas that may have contributed to the build-up of liquidity imbalances and their amplification in times of stress. These areas include money market funds, open-ended funds, margining practices, bond market liquidity and fragilities in USD cross-border funding. The policy proposals aim to reduce liquidity demand spikes; enhance the resilience of liquidity supply in stress; and enhance risk monitoring and the preparedness of authorities and market participants. They involve largely repurposing existing policy tools rather than creating new ones, given the extensive micro-prudential and investor protection toolkit already available. The FSB will assess in due course whether repurposing such tools is sufficient to address systemic risk in NBFI, including the need to develop additional tools for use by authorities.
Non-bank financial intermediaries (NBFIs) comprise a mixed bag of institutions, ranging from leasing, factoring, and venture capital companies to various types of contractual savings and institutional investors (pension funds, insurance companies, and mutual funds). The commoncharacteristic of these institutions is that they mobilize savings and facilitate the financing of different activities, but they do not accept deposits from the public.
Climate Related Risks and Financial Stability: Climate risk, even a decade back, was not a prerogative of either the policymakers, regulators, or the businesses. However, with the countries becoming increasingly exposed to climate related catastrophe (like wildfires in California, Australia, and Brazil) and extreme weather events (droughts or floods) often causing severe disruption in supply chain or hampering business continuity, the issue of climate change has come to the fore. The risk is further compounded by mitigation related regulatory policies (say due to a carbon tax or cap on fossil fuel usage or banning of diesel cars) that imposes high adjustment costs for the businesses.
The FSB’s final report on regulatory approaches to climate-related risks has highlighted the need for policy authorities to focus on defining, identifying, and gathering climate-related data and indicators that can help with monitoring and assessing climate risk as well as arrive at common definitions for different risks. The report also notes that micro-prudential tools alone may not sufficiently address the cross-sectoral, global and systemic dimensions of climate-related risks. Authorities should consider the possible extensive effects of climaterelated risks on the financial system and develop macroprudential tools by expanding the use of climate scenario analysis and stress testing, with research and analysis on appropriate enhancements to regulatory frameworks.
Crypto Assets and Financial Stability:The Basel Committee has prescribed a global minimum prudential treatment for banks’ exposures to crypto assets to mitigate the risk from crypto assets, which was endorsed by the Governors and Heads of Supervision (GHOS) on December 16, 2022. Under the new standard, banks are required to classify crypto assets on an ongoing basis into the following two groups, where those in Group 2 will be subjected to newly prescribed conservative capital treatment effective from January 1, 2025.
Group 1: Tokenised traditional assets; and crypto assets with effective stabilisation mechanisms that are subject to capital requirements based on the risk weights of underlying exposures as set out in the existing Basel Framework; and
Group 2: those that pose additional risks compared with Group 1. This includes all unbacked crypto assets along with any tokenised traditional assets and stablecoins that fail certain classification conditions. For group 2 crypto assets, a bank’s total exposure must not exceed 2% of Tier 1 capital and should generally be lower than 1%.
The new standard includes description of how the operational risk, liquidity, leverage ratio and large exposure requirements would be applied to banks’ crypto assets exposure.The FSB has proposed a framework for the international regulation of crypto assets activities. It observed that the turmoil in crypto assets market highlights their intrinsic volatility and structural vulnerabilities whereas their interconnectedness with the traditional financial system is increasing. Its recommendations seek to promote international consistency on regulatory and supervisory approaches, which are grounded in the principle of “same activity, same risk, same regulation” approach.
Financial Innovation and Financial Stability: The IOSCO report on innovation facilitators (IFs) has highlighted the use of financial technology to enhance risk management, compliance, and supervision. It covers three types of IFs, viz., innovation hubs, regulatory sandboxes and regulatory accelerators. Innovation hubs and regulatory sandboxes may provide regulators with additional market intelligence and can constitute a source for understanding potential risks and mitigating elements. While establishing IFs, authorities should undertake a comprehensive analysis of function, scope and structure along with potential impact on investor protection, market integrity and financial stability. Test scenarios,expected outcomes and the target audience should be properly defined, and authorities should engage with key stakeholders, industry associations and other relevant authorities to address regulatory barriers for beneficial innovations.
Cyber Risk and Financial Stability:The FSB’s consultative document on cyber incident reporting has proposed greater convergence in cyber incident reporting (CIR) for enhancing cyber resilience of the financial system. It has set out recommendations to address operational challenges arising from the process of collection of information as well as reporting of cyber incidents to multiple authorities, especially during the early stages of a cyber incident when confidence may be low about the cause and probable impact of the incident. The consultation also covers establishing common terminologies related to cyber incidents and the proposal to develop a common format for incident reporting exchange (FIRE). Harmonised CIR schemes necessitate a common language and common definition and understanding of what constitutes a cyber incident, to avoid over reporting of incidents. A review of incident reporting templates and stocktake of authorities’ cyber incident reporting regimes indicated a high degree of commonality in the information requirements for cyber incident reports. Building on this, it is proposed to develop a common reporting format that could be further considered among financial institutions.
The BIS working paper on cyber risk in central banking has highlighted phishing and social engineering as the most common methods of cyber-attacks related to central banks. The growing adoption of cloud-based services as well as the shift to remote work has key implications for cyber security strategies. In the absence of a well-defined perimeter, one of the challenges of cloud adoption relates to information security being threatened by lack of consistently applied security controls. The BIS survey reveals that central banks have notably increased their investments in cyber security since 2020, giving priority to technical security control and resiliency and focussing on developing incident response plans. Major cyber shocks may exacerbate liquidity risk and consequent fire-sale of assets for firms. Thus, cybersecurity measures and regulations are receiving greater attention from policymakers.
- Domestic Regulatory Developments
The Financial Stability and Development Council (FSDC), chaired by the Union Finance Minister, met on September 15, 2022. The Council deliberated on early warning indicators for the economy, improving the efficiency of the existing financial/ credit information systems, issues of governance and management in systemically important financial institutions (SIFIs), strengthening the cyber security framework in financial sector, common know-your-customer (KYC) for all financial services and related matters, status of the account aggregator (AA) framework, issues relating to financing of the power sector, the strategic role of the International Financial Services Centre (IFSC) in India, inter-regulatory issues relating to Gujarat International Finance Tec-City (GIFT) – IFSC, and the need for utilisation of the services of registered valuers by all government departments. The Council noted that there is a need to monitor financial sector risks and market developments on a continuous basis to ensure appropriate and timely action for strengthening financial stability. The Council also took note of the preparations in respect of financial sector issues to be taken up during India’s G-20 Presidency. Members resolved to remain vigilant and proactive to ensure that financial markets and financial institutions remained resilient amidst destabilising global spill overs.
Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022: Entities which do not hedge their foreign currency exposures can incur significant losses during a period of heightened volatility in foreign exchange rates. These losses may reduce their capacity to service the loans taken from banks and increase their probability of default thereby affecting the health of the banking system.To address the risk emanating from banks’ exposure to entities having Unhedged Foreign Currency Exposure (UFCE), several guidelines / instructions were put in place starting from October 1999. A review of these guidelines was undertaken and consolidated as master directions to all commercial banks (excluding payments banks and RRBs). Some of the key changes incorporated in the directions are to provide clarity/ reduce compliance burden are as under:
- Exemption from UFCE guidelines: Banks’ exposures to entities arising from derivative transactions were exempted, provided such entities have no other exposures to banks in India. This exemption has been expanded to include factoring transactions.
- Alternative method for exposure to smaller entities: To reduce the compliance burden, the threshold for ‘smaller entities’ based on total exposure from banking system has been revised to Rs. 50 crores (up from Rs.25 crore). For such entities, banks will not be required to periodically obtain hedging information.
Review of Regulatory Framework for ARCs: Asset reconstruction companies (ARCs) play a vital role in the management of distressed financial assets of banks and financial institutions. Based on the recommendations of a committee set up by the Reserve Bank to undertake a comprehensive review of their working, the extant regulatory framework has been amended to strengthen governance norms, enhance transparency and disclosures, strengthen prudential requirement and increase the efficacy of ARCs. The guidelines inter alia mandate an independent director as Chair of the Board, maximum continuous tenure of 15 years for the Managing Director (MD)/ Chief Executive Officer (CEO) and wholetime Directors, constitution of an Audit Committee and a Nomination and Remuneration Committee. ARCs are required to disclose the information about the track record, rating migration and engagement with rating agency of schemes floated by them over the last eight years. From a prudential perspective, the minimum net owned fund (NOF) of ARCs has been increased to Rs.300 crore. They are required to invest in security receipts (SRs) at a minimum of the higher of the 15 per cent of transferors’ investment in the SRs or 2.5 per cent of the total SRs issued. ARCs are also permitted to act as resolution applicant under the Insolvency and Bankruptcy Code (IBC), 2016, subject to certain conditions. Lenders can now transfer all categories of special mention accounts to ARCs. Furthermore, the avenues for deployment of surplus funds have been broadened. Linking the collection of management fee/ incentive to the recovery effected from the underlying financial assets is expected to shift the focus of ARCs from a management fee mindset to resolution mindset.
Regulations Review Authority 2.0: The Regulations Review Authority 2.0 (RRA) was set up by the Reserve Bank in 2021 with the objective of inter alia enhancing the ease of compliance for regulated entities (REs). Based on internal and external review process, the RRA made recommendations on reduction of regulatory burden, rationalisation of reporting mechanism and streamlining of regulatory instructions and communication. For further ease of access to information, a ‘Regulatory Reporting’ portal has been created within the RBI website, which contains information relating to statutory, regulatory and supervisory returns at a single source. For dissemination among the REs and stakeholders, press releases recommending withdrawal of certain regulatory instructions and discontinuation/ merger/ online submission of returns were issued.
Regulatory changes undertaken in respect of Urban Cooperative banks:
The Reserve Bank had formed an Expert Committee on UCBs in 2021. The recommendations of the Committee have since been examined for implementation duly factoring in the feedback received. The major recommendations, which have been accepted/ accepted with modification include:
- Adoption of a simple four-tiered regulatory framework with differentiated regulatory prescriptions aimed at strengthening the financial soundness of the existing UCBs. Specifically, a minimum net worth of Rs.2 crore for Tier 1 UCBs operating in single district and Rs.5 crore for all other UCBs (of all tiers) have been stipulated. The UCBs which do not meet the requirement, have been provided with a glide path to facilitate smooth transition to revised norms.
- Revision of minimum CRAR to 12 per cent to strengthen the capital structure of Tier 2, Tier 3 and Tier 4 UCBs. UCBs which do not meet the revised CRAR have been provided with a glide path for achieving the same in a phased manner. For Tier 1 UCBs, CRAR is retained at 9 per cent.
- Introduction of automatic route for branch expansion to UCBs which meet the revised financially sound and well managed (FSWM) criteria and permitting them to open new branches up to 10 per cent of the number of branches as at the end of the previous financial year, subject to a minimum of one branch and a maximum of five branches.
- Assignment of risk weights for housing loans based on Loan to Value (LTV) Ratio alone, which would result in capital savings.
- Inclusion of revaluation reserves in Tier-I capital subject to applicable discount on the lines of scheduled commercial banks.
Appointment of Internal Ombudsman by the Credit Information Companies: With a view to strengthening and improving the efficiency of the internal grievance redressal mechanism of credit information companies (CICs), it has been decided to bring the CICs under the Internal Ombudsman (IO) framework. Under the mechanism, all complaints that are partly or wholly rejected by CICs will be reviewed by the IO before the final decision of the CIC is conveyed to the complainant.
Guidelines on Digital Lending: Based on the recommendations made by the Working Group on Digital Lending, the Reserve Bank issued guidelines on digital lending applicable to all commercial banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks and non-banking financial companies, including housing finance companies (collectively referred to as REs). The guidelines seek to achieve transparency and fairness inter alia by (a) mandating flow of funds between lenders and borrowers only through their bank accounts without any pass-through account/ pool account of any third party; (b) ensuring loan service providers do not collect any fee/charges directly from the customer; (c) transparent disclosure of the key facts of the borrowing arrangement including the all-inclusive cost to a borrower; (d) ensuring need based collection of data with audit trails backed by explicit customer consent; and (e) putting in place an appropriate privacy policy with regard to customer data.
International Trade Settlement in Indian Rupees:In order to promote trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR, an additional arrangement has been put in place for invoicing, payment and settlement of exports/ imports in INR. Under the Foreign Exchange Management Act, (FEMA), 1999 the broad framework for cross border trade transactions in INR is: (a) all exports and imports under this arrangement may be denominated and invoiced in INR; (b) the exchange rate between the currencies of two trading partner countries may be market determined; and (c) settlement of trade transactions under this arrangement shall take place in INR. Accordingly, subject to prior approval from the Reserve Bank, Authorised Dealer (AD) banks in India are permitted to open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country for settlement of trade transactions, and Indian exporters may receive advance payment in INR against exports from overseas importers through this channel.
Master Directions on Transfer of Loan Exposures and Securitisation of Standard Assets (Amendments):Master Direction on Transfer of Loan Exposure was amended to inter alia permit overseas branches of specified lenders to (a) acquire only ‘not in default’ loan exposures from a financial entity operating and regulated as a bank in the host jurisdiction; (b) transfer exposures ‘in default’ as well as ‘not in default’ pertaining to resident entities to a financial entity operating and regulated as a bank in the host jurisdiction; and (c) transfer exposures ‘in default’ as well as ‘not in default’ pertaining to non-residents, to any entity regulated by a financial sector regulator in the host jurisdiction. Amendments have also been made in certain provisions related to minimum holding period (MHP), valuation of security receipts (SRs), transfer of stressed loans to ARCs, and credit/ investment exposure of lenders. Additionally, the term ‘Economic Interest’ has now been explicitly defined as ‘the risks and rewards that may arise out of loan exposure through the life of the loan exposure’. In December 2022, the Reserve Bank, disallowed securitisation of loans with residual maturity of less than 365 days. Furthermore, it was clarified that the minimum holding period (MHP) for commercial or residential real estate mortgages shall be counted from the date of full disbursement of the loan, or registration of security interest with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), whichever is later.
Identification of NBFCs in the Upper Layer: The blow-up of IL&FS four years back was one of the biggest financial crises involving a big conglomerate that seized the financial system and sapped liquidity. The debt involved was about Rs.1 lakh crore, of which only Rs 55,000 crore have been resolved and about 62% of it is unresolved. Considering the evolution of NBFCs in terms of size, complexity, and inter connectedness within the financial sector, the Reserve Bank had issued ‘Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs’ on October 22, 2021, to align the regulations for NBFCs with their changing risk profile. The framework categorised NBFCs in Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL) and Top Layer (NBFC-TL) and stated that the Upper Layer shall comprise those NBFCs which are specifically identified by the Reserve Bank, based on a set of parameters and scoring methodology as provided in the framework. The top ten NBFCs in terms of their asset size shall always reside in the Upper Layer. Accordingly, a list of sixteen NBFCs categorised as NBFC-UL was released on September 30, 2022.
Digital Rupee (e₹) – Wholesale and Retail:Digital Rupee (e₹), the CBDC in India, is similar to the physical currency in terms of being a legal tender, accepted as a medium of payment and a safe store of value. The e₹ will provide an additional form of money to be used by the public. A pilot for e₹ in the wholesale segment (e₹-W) for settlement of secondary market transactions in government securities, was launched on November 1, 2022with the participation of nine banks. It is expected to make the inter-bank market more efficient and reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. Based on the learnings from this pilot, other wholesale transactions and cross-border payments will be the focus of future pilots. The first pilot e₹ in the retail segment (e₹-R) was launched on December 1, 2022 in select locations in a closed user group comprising customers and merchants across the country. The first phase has begun with four banks, and more banks will join this pilot subsequently. The e₹-R pilot will provide the public with a risk-free medium of exchange as it represents a direct liability of the central bank, with features of physical cash like trust, safety and immediate settlement finality in digital transactions.
Enabling framework for Regulatory Sandbox: The Reserve Bank issued standard operating procedure (SOP) for Interoperable Regulatory Sandbox (IoRS) to facilitate testing of innovative products/ services whose business models/ activities/ features fall within the regulatory ambit of more than one financial sector regulator. The SOP for IoRS has been prepared by the Inter-Regulatory Technical Group on FinTech (IRTG on FinTech). The regulatory sandbox framework of the regulator under whose remit the ‘dominant feature’ of the product falls, shall govern it as ‘Principal Regulator (PR)’. The regulator/s under whose remit the other features apart from the dominant feature of the product fall shall be the ‘Associate Regulator (AR)’. The test design shall be finalised by the PR in consultation with the AR.
REITs and InvITs – Fund Raising and Future Outlook: Real Estate Investment Trusts (REITs) comprise of portfolios of commercial real estate assets, a major portion of which is already leased out. While Infrastructure Investment Trusts (InvITs) comprise of portfolios of infrastructure assets such as highways and power transmission assets etc. REITs and InvITs facilitate real estate and infrastructure financing and investment in the country. There are five registered REITs and 19 registered InvITs with the SEBI as on November 30, 2022. Till November 30, 2022, InvITs raised Rs.79,483 crore, while REITs raised Rs.15,250 crore. The Union Budget of 2022-23 has allocated Rs.7.5 lakh crore for infrastructure, which is 35.4 per cent more than the allocation in the previous year. The Government of India has also laid an added thrust on infrastructure development, with its focus on initiatives like PM GatiShakti, National Infrastructure Pipeline, inclusive development and financing of investments.
Corporate Insolvency Resolution Process (CIRP): Since the inception of the Insolvency and Bankruptcy Code (IBC) in December 2016, 5,893 CIRPs had commenced by end-September 2022, of which 67 per cent have been closed. Of these, around 21 per cent were closed on appeal or review or settled, 19 per cent were withdrawn, 46 per cent ended in orders for liquidation and 14 per cent culminated in approval of resolution plans). Till September 30, 2022, 553 CIRPs have ended in resolution. Where the processes were initiated under section 7 of the Code, realisation by financial creditors (FCs) under resolution plans in comparison to liquidation value was 201 per cent while the realisation by them was 33 per cent of their claims. 46 per cent of the closed CIRPs yielded orders for liquidation, as compared to 14 per cent ending up with a resolution plan. However, more than 76 per cent of the CIRPs ending in liquidation (1349 out of 1774 for which data are available) were earlier with the Board for Industrial and Financial Reconstruction (BIFR) and/ or are defunct. The economic value of most of the corporate debtors that ended in liquidation had almost completely eroded even before they were admitted into CIRP. These CDs had assets, on an average, valued at less than 8 per cent of the outstanding debt amount.53 per cent of CIRPs initiated by operational creditors (OCs) were closed on appeal, review, or withdrawal. Such closures accounted for about 72 per cent of all closures by appeal, review, or withdrawal. There is a need for more prompt action through identification and filing of accounts so that resolution process may result in sufficient value for the stakeholders.
Conclusion
Financial sector regulation involves continuous assessment of risks with pro-active policy responses. In the current challenging global environment, regulatory efforts are focused on addressing vulnerabilities in non-bank financial intermediation and core segments of financial markets. Protecting the financial system from the ill effects of climate risk is a major policy goal for regulators. The increasing threat of cyber risk is another key focus area for regulators, given its potential to increase vulnerabilities at institutional and system levels. Domestically, the goal is to safeguard the domestic financial system from internal and external shocks while protecting customers and preserving financial stability. In this context, regulatory measures are aimed at improving the resilience of financial intermediaries, easing compliance, reducing regulatory costs, driving digitalisation, improving customer protection and access to finance. Regulators remain alert to the rapidly changing financial ecosystem with a view to enhancing its efficiency and ensuring its soundness and stability. The right policy trade-offs, in emerging markets like India, is the need of hour and the central bank when designing regulation and supervision for the banking sector must address all tough challenges to ensure a sustainable growth.
There is evidence that the economic reforms undertaken since 2008 have provided many wide-spread benefits. This includes macroeconomic benefits that have resulted in more stable economic growth and restrained inflation. It also includes micro economic benefits that have resulted in a greater amount of choice for consumers, lower prices and improved quality of services. Every reform brings visible changes in the sectors for which it is targeted but such an impact cannot be isolated only to that segment of economy. No matter how relevant the present policies of a bank are, we must study the possible impact of such reforms on our working to ensure continuous improvement. The disguised impact of economic reform needs to be recognized and arrangements to assist transition can be an important part of policy design. A reform is always for betterment of prevailing conditions, and we have to be adaptive to such changes so that banks remain in good shape in the marathon of economic development and the public money is safely and profitably deployed.