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Scrapping over scraps

The ungainly spat between the stock market and insurance watchdogs over selling mutual funds could have a happy fallout. Regulators must apply their minds to raising India’s financial savings.

india Updated: Apr 12, 2010 23:14 IST

The ungainly spat between the stock market and insurance watchdogs over selling mutual funds could have a happy fallout. The incident should drive home the point that India is in urgent need of a super financial regulator that can prevent things from falling between the cracks while papering over turf battles among statutory agencies. Regulation has historically followed financial innovation, often with disastrous consequences like the recent meltdown in the global credit market. The challenge for Indian policy makers is to shorten this lag, not to erect irrational fences. Mature capitalist systems offer fairly robust oversight templates. It makes sense to tweak them for local use rather than work up from first principles.

Two forces are driving the evolution of financial markets. One is the frenzied mutation of financial products as risk management becomes increasingly sophisticated. Esoteric instruments like derivatives cannot be governed by the playing rules of the 20th century. And two, the modern consumer prefers to shop at financial supermarkets rather than at individual vends for stock broking, insurance and loans. Most modern banks have seen the writing on the wall and reinvented themselves as department stores that cater to every financial need of their customers. The order by the Securities and Exchange Board of India (SEBI) last year that mutual funds cannot charge an entry load merely shifted their distribution to insurance-linked plans which were more generous towards their agents. In any case, since banks own both fund houses and insurers, they make money from one arm or the other.

And in either case the investor pays. Call it entry load or agent commission, that money is not being used for the purpose you intended it. But financial service providers must realise such regulatory arbitrage is self-defeating. Indians saved Rs 36 of every Rs 100 they earned in 2007-08. Only

Rs 4 of this was invested in mutual funds and an even lower Rs 2 went into new life insurance premiums. Considering companies account for every three in four rupees parked in mutual funds, the recent scrap is over scraps. The bulk of India’s savings is locked up in relatively unproductive physical assets like land and gold. Squabbles over who gets to pocket the easy money in financial investments will do little to arrest this trend. For a country that invests more than it saves, having funds stuck outside the financial system serves little purpose other than enriching foreign capital. The stand-off between the Insurance Regulatory and Development Authority and Sebi is an opportunity to harmonise regulation and move to a regime that manages systemic risk better. It can remove the structural rigidities in the way we save and invest.