India’s financial market regulators should review and improve their process of public consultation, which is conducted in the course of the formulation of new regulations, according to Renuka Sane, an associate professor at the National Institute of Public Finance and Policy.
Sane spoke to BQ Prime on the sidelines of the Law, Economics, and Policy Conference organised by the Institute of New Economic Thinking at FLAME University in Pune.
Often, regulations that are meant to fix one problem in the financial markets have unforeseen consequences, some of which could hamper financial inclusion, Sane said.
One example of this is the regulations that were formulated to govern microfinance institutions after incidents of suicide that allegedly took place on account of coercive collection practises by lenders.
“The state government of Andhra Pradesh effectively banned microfinance in the state, and this was very expensive for consumers because they lost a source of credit. And second, we ended up with microfinance institutions, which are regulated like NBFCs. We have a new category called NBFC-MFIs, which have a lot of prudential norms placed on them,” she said.
Sane points out that regulations in some form were necessary, and they helped to clean up the sector by bringing in larger companies and more capital. But on the other hand, the entry barriers for microfinance institutions were raised, reducing the potential supply for individuals that could have otherwise received access to credit.
“This is effectively a prudential solution to a consumer protection problem. It’s not that we don’t need consumer protection. Of course, we do. But was this the right tool?” she said.
Regulators should ideally provide details of the reasons why they choose to disregard suggestions received during public consultation, and they should also conduct a cost-benefit analysis for major new regulations.