Regulation as an Augmentor of Competition: The Indian Experience with the Banking Sector †

Abstract

The process of financial liberalization provides an excellent opportunity to the authorities to use relaxations in regulations to promote orderly competition. Despite its critical importance, any suggestion of an appropriate sequencing pattern is notable by its absence. This article is a preliminary attempt to draw broad contours of a feasible sequencing strategy which is based on the Indian experience. The outlined strategy is expected to serve as a useful reference point to other countries embarking on a similar liberalization programme. The suggested strategy envisages the preparation and acceptance of an appropriate vision statement, which would be an indicative document. The actual implementation of the programme, to be taken up by the concerned agencies in mutual coordination, needs to take into account the evolving environment, the absorptive capacity of the intermediaries and their financial position. Conceptually, it is preferable to strengthen the existing entities before opening the sector to competition. Strengthening finance, especially capital, and changes in policy, procedures, as also enhanced disclosure should form part of the strengthening process. While opening the banking sector for com petition, it is essential to erect stringent entry-barriers. In consonance with the changes in regulation, a new supervision strategy, stance and means in which prudential norms would replace micro-management, should be adopted. While introducing changes, it is preferable to aim at reaching the best international practices at the earliest.