Problem in bond market is root cause of banking sector crisis: CAG

Comptroller and Auditor General (CAG) of India Rajiv Mehrishi today said the root cause of banking sector crisis in India is the problem in bond market as the RBI acts as regulator as well as trader.

Mehrishi further said the central bank, in its effort to ensure that banks don't fail, has slowed down giving licences to new banks.

"We have strange bond market where regulator of bond market is also a trader. This is misinterpretation of RBI Act. The root cause of banking sector crisis is the problem in the bond market in India," the CAG said.

He was delivering the Competition Commission of India's (CCI) annual day lecture on 'Competition Law 2.0: Way Forward'.

Mehrishi also held the position of Union finance secretary in the past.

He pointed out that very few new banks have got licence in India in recent years, and that is example of abuse of market dominance by the state.

"(The) RBI, in its effort to ensure that banks don't fail, has slowed down giving licences to new banks...so it promotes uncompetitive behaviour," he noted.

Referring to the USD 16 billion (Rs 1.05 trillion) Walmart-Flipkart deal, the CAG said, "Walmart may have several common shareholding with Amazon, and that also needs to be worried about".

Mehrishi said that the market must work efficiently but that does not happen due to asymmetry of information and abuse of power etc. "Therefore state intervention is required in the market".

Stating that there has been huge expansion of markets and growth of new economy, he said, "New Economy is also likely to have dominance and abuse of dominance so we need to look at new economy".