India's financial sector has mostly been insulated from the risks in the international markets mainly due to a strong regulatory framework. While we do have a largely free market-based banking system, India has ensured that its regulatory checks and balances prevent any undue exposure to global risk and the financial sector is prepared to cushion adverse situations. The regulatory requirement also ensures that there is adequate liquidity available at any point of time and the overall exposure to any particular asset class is limited. Indeed, there is perhaps no other country in the world where the regulatory requirement for risk-free investments are so high.
It is imperative to constantly work towards increasing the efficiency of our financial system. We must ensure that our financial markets are driven by market forces and competition in all aspects of their functioning — ownership, business activities, network building, lending norms and regulatory requirements. In addition, we must focus on the development of missing markets and increasing liquidity in existing ones to ensure the development of a sound financial system. For example, the corporate bond market in India needs to grow rapidly while markets for exchange-traded interest rate and foreign exchange derivatives contracts must be created. At the same time, we must also ensure a level playing field for financial institutions and remove any artificial advantage that a particular entity would have over another engaged in the same business. The financial system should be driven by competitive forces.
Along with the development of financial markets, there is also a need to continue improving the regulatory framework governing the system. In this regard, we must focus on creating a more streamlined regulatory architecture that reduces regulatory costs and overlaps and removes existing gaps. We must also encourage a move towards a principle-based regulation system involving less detailed prescription for market functioning and a greater reliance on practice and precedent than strict rulebook interpretation. Such a principle-based approach would avoid the centralised micro-management of day-to-day operations of enterprises, increasing their efficiency and encouraging greater innovations in financial firms operating in India.
Given the increased focus on ensuring continued reforms in the financial sector, we will soon see the emergence of a financial system comparable to the best in the world. Sustained growth has tremendous implications for the financial services sector and this sector is uniquely positioned to benefit from the growth cycle. On the one hand, consumers will continue to provide a rapidly growing market for a wide range of products and services thereby leading to a growing demand for competitive and sophisticated retail financial services. On the other, capacity expansion by manufacturing firms and infrastructure development will lead to greater demand for financial resources.
Going forward, the financial sector will play a key role in India's economic growth success. It will also play a major role in modernisation and growth of the rural economy. The penetration of financial services in India will deepen and become more widespread with the banking system growing in size to match those of the other developed economies. The trends of development and sophistication are already evident across the spectrum of financial services, including insurance and asset management and we are seeing a variety of new product offerings and innovative methods of distribution fostering robust growth in these areas. The number of people with access to formal sources of credit and the protection of life or health insurance will see an exponential increase and in the next few years, we must, therefore, focus on scaling up these markets resulting in greater penetration of financial services. The next decade promises to be a phase of exponential growth for financial services in India. It is on this basis that we will see the emergence of large Indian financial institutions on the global stage.
Also critical to the development of the financial sector is building up an adequate pool of talent with the skills suited to work in a developed financial services setup. We are today facing a situation where it is not employment generation which is a challenge, but finding the requisite numbers of people with the requisite skills to fill the jobs that are available or are being created every year. This is leading to a paradox of unemployment and poverty co-existing with skill shortage and wage inflation. This requires a reinvention of our traditional thought process with respect to education and employment. Instead of employers competing with each other and suffering escalating wage costs, we need to implement large-scale curriculum change in higher education institutions; implement accelerated vocational training to achieve quick employability among the unskilled population of working age; and thus quickly expand the pool of available manpower at all levels. Many such initiatives are already in place and we must now make concerted efforts to scale them up rapidly particularly with respect to financial education.
To sum up, we are passing through a turbulent phase in the global economy, the spill-off of which is being witnessed in India as well. While India can never be fully insulated from global happenings, it is more likely to be affected by sentiments rather than fundamentals given the way it has built its economy. The turbulence in the global market will once again test the economy's resilience as it had done during the currency crisis in south-east Asia, and provide the industry and policy makers with insights and lessons to build an even more robust framework for reforms. This will only make our financial system more inclusive, robust and efficient.
(The author is managing director & CEO, ICICI Bank)
K V Kamath
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