The Department of Financial Services is the government body that regulates the country’s financial industry, which consists of its banks and other lending institutions, as well as the growing insurance sector. It has developed institutions and mechanisms, along with the pension reforms, to encourage investment of wealth, to enable the citizens take advantage of the country’s collective wealth and to assist players in the key sectors of the economy such as agriculture, infrastructure and exports. The department’s Office of the Custodian appointed under the Special Court (Trial of Offences Relating to Transactions in Securities [TORTS]) Act, 1992, investigates complaints from the securities market and in conjunction with a panel of judges has been empowered to liquidate assets of those guilty of illegal practices to recover losses caused. An appointed Indian Administrative Services bureaucrat heads the Department of Financial Services.

The banking and insurance division of the Department of Economic Affairs was converted into a full-fledged Department of Financial Services in 2007 and has evolved significantly in the past few years. The India Infrastructure Finance Company Limited, set up in 2006, has embraced the Public-Private Partnership model in providing financial assistance — for example, by direct lending and refinancing — to firms involved in infrastructure projects in the country. In 2008, its subsidiary, IIFC (UK), opened in London to facilitate imports of equipments for infrastructure projects by making loans available to them in foreign currency. Another subsidiary, IIFC Projects, specializes in consultation, and the parent company now also has a debt fund. The new Irrigation and Water Resources Finance Corporation funds irrigation, waste water treatment and sanitation projects. The pension scheme has now been extended to the unorganized (informal) sector, too. 

The Department of Financial Services is the federal government’s eye on the banking and insurance sectors, both of which comprise companies that it owns as well as private firms. The department lays down rules and guidelines for the government-owned entities, appoints their heads and works toward expanding financial services to rural, outlying regions of the country. It also helps chart out the government’s policies and regulates private players. The Pension Fund Regulatory and Development Authority, charged with increasing participation in the fund especially among the weaker section of the society, also reports to the Department of Financial Services.  

In March 2011, the Financial Sector Legislative Reforms Commission was set up under the chairmanship of retired Supreme Court judge, BN Srikrishna, to examine all the laws that provide the framework for regulating the sector. The commission will study more than 60 Acts written over many decades, including the RBI (Reserve Bank of India) Act, SEBI (Securities and Exchange Board of India) Act and IRDA (Insurance Regulatory and Development Authority) Act over a period of two years and recommend ways to do away with ambiguities and overlaps, to bring them in tune with today’s interconnected financial world and to make them more effective with regard to the use of technology in the delivery of financial services.

Autonomous/Attached Bodies:

National Bank for Agriculture and Rural Development (NABARD)

National Bank for Agriculture and Rural Development was established in 1982 through a special law enacted by the Parliament. It extends credit to rural banks, helps create self-help groups in collaboration with local non-governmental organizations (NGOs) and establishes linkages between banks and self-help groups. Through all its activities, it seeks to sustain livelihoods in rural areas and develop the rural economy. Recently, after NABARD had sought the services of Boston Consulting Group for restructuring of its operations, a group of MPs wrote to the finance minister appealing against the proposed move. They were of the view that the raising of funds in the open market, as is envisioned in the new system in place of credit provided by the Reserve Bank of India, would deny farmers and the rural poor loans at low interest rates.

Insurance Regulatory and Development Authority (IRDA)
The Insurance Regulatory and Development Authority (IRDA), consisting of a chairman, five full-time members and four part-time members, is appointed by the federal government to oversee both the “life” and “non-life” sectors of the industry. Its duties, specified in the IRDA Act, include facilitating growth of the industry, vetting and registering new private business entities, promoting transparency and fairness, protecting interests of clients and ensuring timely settlement of claims.

 

Three quarters of the budget is allocated for salaries. Offices expenses account for 11.2% of the budget. The Special Court under the TORTS Act is allotted another 11.2%, most of which went to paying salaries and allowances as well as domestic travel.

Incidentally, on March 14, 2011, the Custodian released $396 million to the Income Tax Department and State Bank of India by selling Harshad Mehta group’s assets. The late Harshad Mehta was a stockbroker who became a household name in 1992 when he was arrested for purchasing shares using loans illegally obtained from banks. As part of government’s efforts to recover the $903 million (based on 1992 prices) loss incurred by financial entities, the Custodian, working alongside The Special Court, has recovered and released $722 million.

The Continuing Farmer Suicide Epidemic

Over the years, a large number of farmers have resorted to taking their own lives after finding themselves in an inescapable debt trap. Without access to institutional credit, they are forced to borrow from local moneylenders at high interest rates, and are often unable to repay because of crop failures and low prices of their produce. This has been especially true of cotton farmers in the Vidarbha region of Maharashtra. Between January and May 2012, over 300 farmers took their lives in western Vidarbha alone.

Five Vidarbha Farmers Kill Self; 332 Suicides This Year (by Ramu Bhagwat, Times of India)

3 More Farmers Commit Suicide In Vidarbha (DNA)

209 Vidarbha Farmers Committed Suicide In 2011 (Business Standard)

India’s Shoddy Credit Rating

In June 2012, the news that Fitch and Standard & Poor downgraded India’s credit outlook from stable to negative, evoked strong reactions from India’s ruling class. Dinesh Kumar Mittal, secretary, Department of Financial Services, objected particularly to Fitch’s concerns about the lack of capital with eight public sector banks. Mittal said that the banks in India keep about 28.75 % of their deposits with the government and the Reserve Bank of India — “a practice which is followed nowhere else in the world but in India and, as such, there can be no crisis of capital.” Minister of Overseas Indian Affairs Vayalar Ravi went as far as terming the downgrades an international conspiracy backed by three non-resident Indian businessmen. Ravi, however, who has a history of blaming India’s problems on foreign conspiracies, didn’t name the three businessmen.

Outlook Downgrade of Fis Unwarranted: Mittal (The Hindu)

3 Nris Conspiring Against India: Vayalar Ravi (Indian Express)

Moily Hits Out At Rating Firms For Lowering India Outlook (Business Standard)

Spread Microinsurance to Cover Larger Segment of the Population

 With drought and inclement weather often plaguing farmers in India, there is a need to cover India’s rural agrarian underclass against crop failure. These farmers are the same population who borrow from micro-finance. The Centre for Insurance and Risk Management (CIRM) advocates doing this through allowing customers to pay their premiums in monthly installments rather than in the traditional lump-sum payments that are due at the beginning of the policy term made by urban insurance consumers.  

Spreading insurance to the disadvantaged demographic, however, has one main challenge: preventing the predatory practices prevalent in micro-finance. To solve this, IRDA plans on releasing guidelines to regulate the sector.

In 2012, several government and private entities announced their entry into the market.  Perhaps the most interesting entry was that of VimoSEWA, an insurance cooperative born from the Self Employed Women’s Association, a union of women working in India’s massive informal sector.

More Microinsurance Reforms Needed: CIRM To Irda (Centre for Insurance and Risk Management)

IRDA Working On Guidelines For Micro-Insurance Sector (Indian Express)

Allow Paypal Into India

India has a troubled relationship with PayPal, the online payment system owned by Google. Based on new regulations by the Reserve Bank of India, Paypal was no longer able to allow personal transactions In India. The next day Paypal complied, shutting down personal transactions. 

On March 1, 2011, new regulations hit commercial users. Customers could only keep money in their PayPal accounts for up to a week. After that they had to transfer it to their bank account. Transactions are also limited to less than RS. 27, 650 ($500 USD)

The government’s decision to severely restrict PayPal, say small business owners and independent contractors, many of whom work piecemeal in coding or other tech fields, has disproportionally hurt them.

RBI Creates Roadblocks in Online Payments for Paypal (by Puneet Mehrotra, Hindustan Times.

The Truth About Paypal, Why Paypal Is About to Block India Payments after March 1 (Blackhatworld.Com)

India’s Central Bank Stops Some PayPal Services (by Heather Timmons and Claire Cain Miller, New York Times)

Provide an Alternative to Hawala

A prominent factor in Kerala’s excellent standard of living has been the remittances from the numerous Malayalees who work in the Gulf States of Oman, the United Arab Emirates, Bahrain, Qatar and Kuwait. Due to India’s onerous money transfer process, choose to sends their fund through unregulated method of Hawala. This is how it works. A Non-Resident Indian in one of the Gulf States will approach a broker, who are called Hawaladars, and give him a sum of money in the local currency. The broker will then pay his contact in Kerala the equivalent in sum in Rupees. Both men will take a small commission, usually lower than the one charged by the traditional banking sector. Despite the seemingly shady nature of Hawala, which is often used by criminals and terrorists, long-time users say that the illegal networks that run Hawala can be trusted.

There are numerous reasons why many NRI Indians say that Hawala is much more reliable than traditional banks and the interest rates are lower. They will even home deliver the money.  Another barrier to Keralites using traditional banks to transfer money is that for relatives stuck in a small village, there might not be access to traditional banks. Making banks more accessible could easily remedy this, instituting lower fees and providing more locations, especially in rural areas.

A Hawala Tunnel (by R. Krishnakumar, Frontline)

Hawala Trade is Thriving (by Don Sebastian, DNA)

‘Hawala Money Smugglers Are Under Scanner’ (The Hindu)

Is Microfinance Really Good for the Nation?

When Nobel Prize laureate Muhammad Yunus used microfinance to make much-needed credit available to Bangladesh’s poor on trust, profit was not one of his goals. Instead, it was his intention to encourage entrepreneurship, create sources of livelihood and help the poor make profits, which could eventually be used to repay the small loans. Then, during the last decade or so, in rural Andhra Pradesh, microfinance companies were born. Through aggressive selling and recovery of loans, the companies brought home returns for its investors, which included some eminent industrialists. However, a spate of suicides in 2010 by microfinance-loan defaulters put these companies on the state government’s radar. Much of the loans were written off and a crisis loomed over the industry. In May 2012, a bill to regulate the microfinance companies was tabled in the Parliament after receiving the approval of the Union Cabinet. The bill that seeks to make Reserve Bank of India the regulator is yet to be passed. 

Profit as the Problem

Yunus holds the view that microfinance institutions should stay clear of making profits. When profits and returns to the investors becomes the prime motive, loans are forced upon the poor at high rates of interest without taking stock of their ability to repay and what they will be used for. The borrowers in rural Andhra Pradesh found themselves taking a loan to pay back another loan and unable to break the vicious cycle.

A Big Split Over Microfinance (by Megha Bahree, Forbes Asia Magazine)

Profit-Focused Mfis Are Loan Sharks (Times of India)

Profit to Increase Reach

The heads of the microfinance companies don’t quite agree with Yunus. They say that the original altruism remains intact in spite of them looking to make microfinance a profitable enterprise. To cater to the big market for small loans, large investments are needed and to lure investors, the ventures should appear to be profitable. And high interest rates become necessary because small loans are expensive. They also blame the bad press on the politicians whose patronage of the poor through lending money, they say, has been threatened by this new phenomenon of rural India. 

After SKS Success, More Microfinance Public Issues Are on the Horizon (by Namrata Acharya, Business Standard)

Commercial Mfis Can Make Markets Work for the Poor (Krishnamurthy Subramanian, Economic Times)

Shashikant Sharma

Shashikant Sharma, a 1976-batch IAS officer, had the charge of Department of Financial Services from February to July 2011. Before joining the Department of Financial Services, he served in the Ministry of Defense in various capacities. He has a master’s in Political Science, and a Masters of Science from University of York in Administrative Science and Development Problems.

Official Bio