Plenary Session, Saturday, June 5, 2004, The Oberoi at 9:00 am 1. I am pleased to welcome you to this two-day conference on the financial sector, which is the third in a series of such conferences arranged by the Bank in partnership with the Government of India. In keeping with tradition, we should have been in Goa today. Unfortunately, we had to change the venue at the last minute because the parliament session made it impossible for many of our key speakers and participants to get away from Delhi. Our apologies for this, and for demanding your attention early on a Saturday morning. ************** 2. Financial reforms were central to India’s economic liberalization program initiated in the early 1990s. After more than a decade of reforms since 1991, India’s financial sector – including markets, institutions and products – has changed, in some respects, beyond recognition. Capital markets are deeper, more liquid and much more open. While the banking sector continues to dominate the financial system and remains overwhelmingly government-owned, competition has increased. Private entry has also been progressively allowed into mutual funds and, more recently, insurance. A recent development that is likely to stimulate the development of pension funds, and the greater participation of private sector pension fund managers, is the decision of the Government of India in 2003 to change the basis of pensions for new civil service employees from an un-funded pay as you go defined benefit system to a fully funded defined contribution system. 3. These reforms have led to financial integration at two levels. At one level, the trends towards universal banking and mergers between financial institutions have led to integration between different segments of the domestic financial system. Traditional frontiers between banking, capital markets and insurance have become less distinct. At another level, India’s financial system has become much more integrated with the global financial system. 4. The benefits of a liberalized financial system are well-known. At the same time, a series of financial crises -- in East Asia in 1997, Turkey in 2000 and, more recently, in Argentina --have alerted policy makers and regulators to the potential fragility of financial intermediaries in a deregulated environment. These crises resulted from the interaction of a variety of mutually reinforcing macroeconomic, structural, and political events. Whatever the trigger, the weaker the financial system, the greater have been the fireworks of the collapse and the depth and duration of post-crisis distress. 5. So if there is one lesson above all others from the recent financial crises, it is the importance of a sound and well-regulated financial sector. This means better disclosure, better supervisory norms and their proper enforcement. And it means having a financial regulatory structure that makes the regulator properly accountable, and ensures that regulators are properly equipped to anticipate problems in complex and integrated financial systems, detect fragilities, take prompt corrective action to deal with distressed institutions, and minimize opportunities for regulatory arbitrage by financial intermediaries. 6. India’s financial system has shown a great deal of resilience. India appears to be sheltered from a crisis triggered by an external macroeconomic shock of the type suffered by the East Asian countries, because India’s exchange rate regime is flexible, foreign exchange reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. It should also be noted that, in recent years, India has gone a considerable way in improving financial sector regulation. Prudential norms have been tightened, bank capital bolstered, and the supervisory systems strengthened. 7. But important weaknesses remain, and need to be addressed. Stock market scams, the UTI story and problems with cooperative banks, underline the importance of enhancing supervision and governance. Moreover, as the financial sector becomes more open, the challenge facing India’s regulators will become ever greater. 8. It is against this backdrop that we decided to focus this year’s Financial Sector Conference on the theme of “Aligning Financial Regulatory Architecture to Country Needs”. I am pleased to note that the conference has brought together experts from India and from around the world – Australia, China, Hong Kong, Jamaica, Korea, Jamaica, South Africa and the UK. The conference should provide an ideal forum for participants to share experiences on how they were able to manage the transition to more appropriate regulatory structures to cope with the risks and opportunities posed by increased financial sector liberalization, and what it took to make the new structures work in their respective countries. And I hope this discussion will help India’s policy makers and regulators in their efforts to better align the country’s financial regulatory architecture to changing needs. Thank you. |
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