Too careful regulation breeds too many crooks

India Infoline News Service | Mumbai |

More than 40% Indians do not have a bank account and over 90% are still untouched by bank loans. Although doors have been opened to new banks, we are being overly severe in terms of number and criteria.

Follow our Chairman Mr Nirmal Jain on Twitter @JainNirmal for his real-time updates and views on policy, economy, markets and more.


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It is quite ironic, and tragic, that we have Sahara, Saradha and suicides despite possessing perhaps the most stringent regulatory framework in the world. All the recent scandals may be more due to extraordinarily tight regulations than a lack of them.


For, while Indian regulators have done well in preventing scams in regulated entities, they may have inadvertently choked growth. And now, Ponzi schemes are filling the gap not filled by regulated service providers.


Take banks. India perhaps has the lowest penetration among all large economies. More than 40% Indians do not have a bank account and over 90% are still untouched by bank loans. Although doors have been opened to new banks, we are being overly severe in terms of number and criteria.


Of course, it is depositors' money and one has to be cautious. However, if the US, an economy that is eight times larger but growing at one-third India's rate, can regulate 7,000 banks, can we not have at least a few hundred?


Only when there is competition are players forced to go beyond large cities. Banks are not a scarce mining resource, nor are they an auctionable resource like spectrum. Then why are we creating artificial scarcity?


The regulator is more concerned about risk management and prevention of scams than about the sector's growth. Therefore, nobody is responsible for the large scams happening outside the regulatory ambit. Allow the regulated sector to grow faster - and be prepared for the small problems that come up with it. That is any day more financially prudent than allowing a fast-growing economy's needs to be met by an unregulated sector.


In the 1970s and 1980s, our policymakers regulated capacity and the pricing of steel, cement, edible oil and even matchboxes. They wanted to protect customers from bad products and profiteering. They always misread entrepreneurs' animal spirits.


We have lessons of the last two decades to show that a free market with no entry barriers will deliver the best product and the best price to the consumer. Today, we do not need regulations to make manufacturers sell some of their products in tier-V and tier-VI cities and townships.


Follow our Chairman Mr Nirmal Jain on Twitter @JainNirmal for his real-time updates and views on policy, economy, markets and more.

 

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