Here's how China, India plan to overhaul their financial sector regulations

The plans by both nations have become more significant in the wake of the convulsions expected in the global financial market with the sudden collapse of the Silicon Valley Bank

In a remarkable coincidence, both China and India have outlined plans to refashion their financial sector regulations in 2023.

These plans have become even more significant in the wake of the convulsions expected in the global financial market with the sudden collapse of the Silicon Valley Bank (SVB). The changes come as Beijing tries to impose more controls on capital outflows, regulate spiralling debt and thus restrict “risky” practices as the economy braces for a long struggle against the US.

Typically, India has given a lead time for the plan, which is expected to be incremental and spread out over more than a year. China, on the other hand, has been drastic and given no warning to investors abroad that such a plan was in the works. The concerns for India are more internal, to ramp up the financial sector to support new sectors such as financial technology (fintech) and roll in digital currency.

This month, China has announced that a new National Financial Regulatory Administration (NFRA) will replace the current China Banking and Insurance Regulatory Commission (CBIRC). The NFRA will also cut into the role of 

the central bank, the People’s Bank of China, to bring the supervision of the industry, excluding the securities sector, into a body directly under the State Council, or cabinet.

Along with the NFRA, the China Securities Regulatory Commission, too, will come under the direct administration of the State Council. It will assume responsibility for reviewing corporate bond issuance from the National Development and Reform Commission — the country’s planning body.

At a far modest scale in India, Finance Minister Nirmala Sitharaman has promised to carry out a comprehensive review of regulations of all financial sector regulators. She announced the plan in her Budget speech on February 1 this year. “To simplify, ease and reduce cost of compliance... (the regulators) will consider suggestions from public and regulated entities. Time limits to decide the applications under various regulations will also be laid down”.

The last time the India government reviewed the working of the regulators was more than a decade ago, in 2011. It appointed a commission under Justice B N Srikrishna to comprehensively review and redraw the legislations that govern India’s financial system. A large part of the report of the Financial Sector Legislative Reforms Commission (FSLRC) was encapsulated in the Indian Financial Code that rewrote the powers of the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi) and others.

There was intense pushback, especially from the RBI, which stalled the implementation of the code. But the FSLRC recommendations did, however, create opinion in favour of a monetary policy committee as the rate-setting committee in the RBI that came into being in 2016. But the RBI shot down further recommendations, notably the one to split the monetary policy and the role of managing the banks into separate organisations.

In comparison with the sedate pace of change in India, China has had two major overhauls in the past decade. In 2018, the CBIRC was set up, merging the two regulators for the banking and insurance sectors. Now this merged body will be eliminated by the NFRA.

The changes this time are interpreted as a sign of re-established control by the Chinese President Xi Jinping, who starts an unprecedented third term as president. The changes, where the new regulator directly reports to the cabinet headed by him, will consolidate his political position. The modicum of powers over the financial sector exercised by the local government bodies will be erased.

In recent years, several Chinese tech companies had seemingly weakened the power of the regulators over them as they grew in size. Some of them had listed overseas only, ignoring domestic markets. From 2020, the Chinese government had begun to claw back its powers as exemplified by the fortunes of Ant Group, the largest of these tech companies. The company’s planned IPO was halted by the erstwhile CBIRC. Ant Group is still waiting for a licence to convert itself into something like a bank. That licence, if it is issued, will now come from the NFRA.

“China had notably been on a path of paced regulatory reforms to lower overall financial contagion risk, and recent policy posturing also suggests authorities will err on the side of caution to stem systemic risks. Recent history suggests that authorities have deployed a range of policy tools, including localising banking sector stresses with swift nationalisation,” wrote Louise Loo, lead economist, Oxford Economics.

Analysts noted the proposed NFRA will regulate financial institutions but not consumer protection, a role that could be integrated with another agency carved out of the People’s Bank of China and the China Securities Regulatory Commission (CSRC). These details are not yet in the public domain.

In India, by contrast, the push to update the laws governing the financial sector has been on for some time. Beginning with the RBI Act of 1934, the Acts to set up Sebi and the Insurance Regulatory and Development Authority of India are several decades old. Likewise those for stock exchanges. Only the Pension Fund Regulatory and Development Authority Act and the Insolvency and Bankruptcy Board of India Act were written in the 21st century.

A PRS Legislative Research noted that the FSLRC described the current regulatory architecture as “fragmented and … fraught with regulatory gaps, overlaps, inconsistencies and arbitrage”. The draft Code was supposed to overcome these problems through a “non-sectoral, principles-based law bringing together laws governing different sectors of the financial system”.

However, since the Budget announcements, the finance ministry has not issued further comments on the new plan. The Budget itself has made provision for setting up a National Financial Information Registry as the central repository of financial and ancillary information. The minister noted: “This will facilitate efficient flow of credit, promote financial inclusion, and foster financial stability.”

It is expected that the review, whenever it is done, will resemble the FSLRC exercise in the sense that a committee headed by a judge will be set up. Since the general elections are due latest by April 2024, the timelines for the report of such a committee and its implementation are likely to take place only after that.

India

• Budget 2024 announces plans to cover the regulatory gaps in financial sector laws
• Earlier plan in 2013 was largely left unfinished on pushback mainly from RBI
• Timelines for next-gen reform likely post-2024 general elections

China

• Made one large-scale set of changes in 2018
• Has set up National Financial Regulatory Administration to replace the current 
• China Banking and Insurance Regulatory Commission
• Current plan gives more powers to central government under President Xi Jinping