Insurance 2 (Competition and Ef iciency)

Early in the reforms process, it was recognised that greater competition and innovation would
be required so that the public received better financial services. In its mid term review of the
reform process (Ministry of Finance, 1993), the government stated: “Our overall strategy for
broader financial sector reform is to make a wide choice of instruments accessible to the
public and to producers. ... This requires a regulatory framework which gives reasonable
protection to investors without smothering the market with regulations. ... It requires the
breaking up of monopolies and promotion of competition in the provision of services to the
public.”
Unfortunately, this is one area where actual progress has lagged far behind stated intent. It is
true that some steps have been taken to increase competition between financial intermediaries
both within and across categories. Banks and financial institutions have been allowed to enter
each other's territories. Fields like mutual funds, leasing, merchant banking have been thrown
open to the banks and their subsidiaries. The private sector has been allowed into fields like
banking and mutual funds. Nevertheless, major structural barriers remain:
• All major banks and financial institutions continue to be government owned and
government managed.
• The entire mechanism of directed credit and selective credit controls built up over the
years is still in place, and is being strengthened in certain areas.
• Financial intermediaries have often been compelled to set up separate arms’ length
subsidiaries while entering various segments of the financial services industry. This has
prevented them from benefiting from economies of scope.
• Competition has also been hindered by the undiminished power of cartels like the Indian
Banks Association (IBA). In fact, these cartels have been accorded the tacit support of the
regulators. These half hearted attempts at promoting competition raise fears about the
extent to which our regulators have succumbed to regulatory capture by the organizations
that they are supposed to regulate.
• On the technological front, progress has been slow in important areas. The payment
system continues to be primitive despite the central bank’s attempts to create an
Electronic Fund Transfer System (EFTS). Archaic elements of the telecom regulations
have prevented the financial services industry from benefiting from the confluence of
communications and computing technologies.
If we imagine a Rip Van Winkle going to sleep in the early 1990s and waking up today, he
would not see that much has changed at the grass roots level in the provision of banking
services. (The most visible change would be the much greater spread of credit cards – a
financial innovation that has little to do with regulatory action).
The extremely slow progress in this area means that the Indian consumer has not seen the
benefits of financial sector reforms in the form of better service, better products or better
prices. The efficiency gains of financial sector reforms have simply not happened.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.