ECONOMIC HIGHLIGHTS

NEW DELHI, 25 August 2005

In Developing Economy

ROLE OF REGULATORY AUTHORITIES

By Dr. Vinod Mehta

As we move further towards economic liberalization and privatization,  the role of regulatory authorities as a public watchdog  becomes important.  In most of the developed countries regulatory authorities are statutory bodies with wide powers to take actions against companies and persons who willfully misuse public funds.  In the USA, for instance, regulatory authorities play an important role in protecting the interests of consumers and investors.

It is not that there will be no frauds or misuse of public money after regulatory mechanism is in place, but as the experience of the developed countries shows the possibility of frauds is minimized and the interests of the consumer protected to a very large extent. 

For instance, the foreign exchange management Act and money laundering legislation, which are in place now will protect the genuine players in the economy. They will be harsh on the unscrupulous people who misuse the provisions of these Acts to cheat the individuals, the companies, and the nation.  The need of the hour is to earn substantial foreign exchange and to regulate its outflow as well as check the use of funds for anti-national activities.  After FEMA, the RBI has been relaxing controls on foreign exchange.  The RBI as a regulator of foreign exchange is doing a fine job.

The regulatory mechanism for the Insurance sector has to be very stringent.  The regulatory authority, for insurance, Insurance Regulatory and Development Authority (IRDA), is supposed to see that the funds garnered by the Insurance companies are channeled into sectors as indicated in the bill and that the public who buy their policies are not cheated.  At the same time, the regulatory authority  has to ensure that the Insurance companies remain financially healthy and do not enter into any dubious deals.  This is also true of  Pension Fund Regulatory Development Authority (PFRDA) which is supposed to regulate the investment of pension funds.

It is important for the government to study the role of the regulatory authorities in developed countries and the mechanism they use to protect the interests of the customers and investing public.  In this column we had mentioned about the Insurance Regulatory Authority in Singapore which controls the Insurance business there.  Similarly developed countries like France, Japan, the USA, etc. have their own regulatory bodies and mechanisms to control the financial institutions including the insurance business. 

It may be prudent to study their regulatory mechanisms and adopt them to our own needs.  For instance, all these authorities have data bank on the fraudulent practices indulged by insurance companies to dupe the consumers and investors.  Pre-knowledge of such fraudulent practices will help the regulatory authority in India to be fully equipped to anticipate and deal with such cases before they turn out to be big financial scandals

The regulatory authorities in India are, on the contrary, treated as an appendage of the government; they are not allowed to serve the purpose for which they have been set up.  Take the instance of Telecom Regulatory Authority in India (TRAI); from day one it has been embroiled in some or the other controversy not only with the government but also with the private telecom operators, DOT, BSNL and MTNL. 

When the telecom authority fixed the upper limit of rates for local, STD and ISD calls, there was a large public outcry.  These rates were worked out on some rational basis and the idea was to discourage cross subsidies on various types of calls.  The TRAI approach on fixing tariff for various kinds of calls made economic sense but the government intervened in its functioning on public outcry thus caving into populism.  The Government is now thinking of one India one rate which is not in consonance with the TRAI approach.

The right approach should have been to allow providers of basic telephone services to improve their efficiency and bring down  the cost of local calls.  By intervening in the functioning of the telecom authority the Government only weakened its authority.   Now what regulatory role can be expected from such a regulatory authority?

The point is that when we set up a regulatory authority we must respect its autonomy. The Government must desist from interfering in its assigned role.  Such an interference not only undermines the authority of the regulators but it also provides an opportunity to unscrupulous elements to take advantage of the loopholes. 

The Government is also interfering in the functioning of IRDA. It is issuing directives to it and had some time back  nominated a Joint Secretary (insurance and banking), who is also on the Board of a nationalized insurance company, also on the Board of the  IRDA.  Once the Government starts issuing directives to it or begins interfering in its day-to-day functioning, the Government will only be eroding regulatory body’s authority and giving signals to unscrupulous elements to make hay while the sun of confusion is shining. 

An other element which needs to be introduced in financial organizations including insurance companies is to allow full transparency in their functioning.  The balance sheets of the financial institutions conceal more than what they reveal.  Since these companies invest part of their mobilized funds in Government securities and another part is lent to private companies or invested elsewhere, there must be total transparency in their functioning. 

The insurance and other financial companies like banks etc. apart from coming out with the balance sheets must be asked to reveal the names of the companies to whom the money has been lent and the names of the companies who are not repaying back their loans.  This is the only way to check the growth of non-performing assets of financial companies. 

The term "non-performing assets" is a misnomer; What the term non-performing assets simply means is that the money loaned by a particular financial institution has not been repaid by the borrower.  This outright cheating by the borrower is termed as a non-performing asset which in fact is not an asset at all, but some kind of a liability.  In fact the use of the term 'non-performing assets' must be totally banned;  instead the term 'unrecovered loans' may be used to give the true picture of the state of finances of  financial companies including insurance companies. 

With such a measure the defaulters will not be able to raise any further funds from the financial market and would be forced to set their house in order.  It is really surprising that the Government does not allow the financial institutions to make public the names of the defaulters.  By not allowing the financial institutions to publicly name the defaulters, the Government would actually help such companies to play with the public money. 

All the regulatory bodies, whether regulating insurance business or stock exchanges or telecom sector, must be made autonomous statutory bodies, so that they can play their role effectively to protect the interests of consumers and investors – INFA

(Copyright, India News and Feature Alliance)