FSLRC: Task at Hand

By Harsh Kumar, Senior Associate, Khaitan & Co

Financial sector reform in India is necessary to boost growth, employment and capital inflows. The Government has recently constituted a Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice (Retd.) B. N. Srikrishna to identify the areas of next generation reforms required in the Indian financial sector. This article briefly highlights certain specific areas of financial reforms which FSLRC may examine.  

1.                   Banking sector reforms

There is a need for the government to divest its ownership from the public sector banks (PSUs) and focus on reforming the governance structure of these PSUs. While there may be compelling reasons for the government to continue owning and controlling PSUs, divestment of ownership in favour of more well governed and accountable entities is likely to restore greater efficiency. Considering that the PSUs account for more than two third of the entire banking system, a reform is likely to create a multiplier effect in the entire financial system. 

Further the FSLRC may consider allowing entry to more privately held small finance banks which may cater to median Indian households and offer products that are more locally needed. Adequate safeguards in terms of higher capital adequacy norms, prohibition on related party transactions, lower allowable concentration norms, putting in place