Wednesday October 10, 03:48 AM
More FDI to boost financial sector
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By Economy Bureau
The Organisation for Economic Cooperation and Development (OECD) has advocated for more foreign direct investment (FDI) to increase the efficiency of the country's financial services sector. At present, FDI and foreign portfolio investment in public sector banks had an aggregate cap of 20%, for private banks the limit was 74% (but voting rights were capped), while for insurance companies the limit was 26%, the study pointed out. The report, while calling for banks to be gradually be moved out of the public sector, said thoughts should also be given to whether RBI should continue to supervise the banking sector. The report also mooted ending remaining controls over interest rates. "The financial sector has one of the highest shares of public ownership in the economy and needs to be liberalised further," it said while calling for more foreign competition in financial services. "Despite progressive deregulation, banks can still allocate only 41% of their assets freely, notwithstanding long-standing recommendations from government committees that this ratio should be increased," the report added. It also recommended the government stop directing bank lending and added these moves would improve allocation of capital and boost growth. "Progressive privatisation of the public banks would most likely improve the efficiency of the sector, especially if they were given greater freedom to allocate assets and restrictions on FDI in the sector were removed," the report said. On capital markets reforms, it said regulatory barriers to the development of exchange-traded rate and exchange rate derivatives must be removed. The government must ensure that plans to implement a transparent market in corporate debt were implemented. The report recommended that private sector fund managers be allowed for civil pension defined contribution schemes. Steps must be taken to use the new civil service scheme as the base for wider retirement saving system. On the regulation of financial markets, it said a more principle-based approach to capital market regulation might help speed up the introduction of new instruments. As in product markets, supervisory bodies should be subject to periodic regulatory impact reviews, it said. Also, the government must consider privatising the government bond trading platform run by the Reserve Bank and transferring regulation of the market to the security market regulator.
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