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22 AUG,2022 | MEDC
The 75th anniversary of our independence is an opportune moment to look back and dream ahead. In this context, our financial sector is an appropriate place to begin the streamlining process. Parts of the Indian financial sector have been liberated and this has fueled growth in much of the economy. The rest of the sector should also now be gradually unshackled. Institutional finance in India is now at an inflexion point, and it has tremendous potential to address various market failures. This is an opportunity that policymakers should not miss.
Climate change has the potential to play tremendous havoc on our economy. The challenge for policymakers is how to direct a major shift to harness public and private financing to climate mitigation and adaptation projects. Climate change is a global challenge requiring colossal financing. And this is precisely where blended finance could help. Blended finance is, essentially, the use of financial instruments to combine public, private and philanthropic capital to (i) increase the total capital available for development projects, and (ii) allocate this capital efficiently towards achieving socio-environmental outcomes. The past few years have seen the emergence of a vibrant social finance ecosystem in India. There have also been several examples of blended finance transactions that have helped generate both financial return and social impact. This concept can clearly play a key role in the collective responses of the government, corporates and investors to accelerate India’s socioeconomic development.
As far as crypto assets are concerned, India's financial system would probably be better off without them. Until cryptos are better regulated – at a global level – there is a strong chance of them destabilizing our financial system. We cannot afford to take that risk. More than ever before, rapid technological change as well as frequent and varied shocks make our surveillance critical for safeguarding our monetary and financial stability in order to promote inclusive growth. We need to constantly adapt and sharpen our fiscal and monetary tools for assessing risk to better scan the global financial landscape, and examine how the newer developments therein could potentially benefit us.
As more financial services activity moves from the regulated banking sector to entities and platforms with little or no regulation, so do the associated risks. Despite FinTech stepping in to challenge traditional banks on their own turf, they bring more than competition. In fact, the two are often intertwined, including through the provision of liquidity and leverage by banks to FinTechs. Regulation needs to be reshaped in such a way that the opportunities offered by FinTechs are nurtured, while their risks are contained.
Unleashing the innate potential of India’s financial sector is a work in progress. It is hard creating regulatory capacity to generate deep and liquid markets that are not hijacked by vested interests, and firms that truly serve the best financial interests of the public. However, doing so is necessary if we are to optimize all that our financial sector has to offer us. In this context, policymakers could also promote robust governance, including developing industry codes and self-regulatory bodies. These entities could provide an effective conduit for regulatory oversight. The road ahead remains rocky, and needs to be traversed carefully.
*Picture Credit:Google
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