Cac Vs Crb

The report on capital account convertibility (CAC) projects the heroic side of the financial system. It perceives fundamental strengths, dependable enough to allow the rupee to take its place amongst the worlds top currencies. Of course, the full realisation of the currencys potential is based on passing a number of stringent tests, but the report is optimistic that these will not prove to be insurmountable.

The first of these is that the country learn to live with a low and stable inflation rate, 3 to 5 per cent per year, and that it put its faith in the Reserve Bank of India (RBI) to maintain this course. This is tantamount to giving the Reserve Bank autonomy, at least as far as monetary policy is concerned, a step that in many developed countries has been associated with a lowering in the trend rate of inflation. The committee clearly believes that the RBI as an institution is equipped to handle this responsibility.

 

The second issue that the committee addresses that is directly related to the state of the financial sector is what it refers to as consolidation in the financial sector. One aspect of structural change in the financial sector is the complete deregulation of interest rates. Related to this is the widening and deepening of the market for government securities, with the RBI playing the role of a market maker, and the facilitation of the entry of a number of new players into the market. The other aspect of this consolidation is the effort to improve the functioning of the banking system on a number of fronts. The report recommends sharply reducing the extent of non-performing assets of the banking system. It also recommends a reduction of the average CRR, but simultaneously spreading this prudential coverage over a wider range of liabilities, particularly those which are owed to non-residents. This would naturally improve the liquidity of the system, at the same time making it more dependable as far as foreign depositors are concerned.

Other structural changes recommended by the report relate to a weakening of the distinctions being currently made between banks and NBFCs on a number of dimensions: the kinds of products they are able to offer their clients, the prudential norms that they have to follow and so on. Alongside this, the report also advocates greater autonomy for the publicly owned banks as a necessary step to enable them to deal more effectively with the new and much more hostile environment. All these changes have, of course, to be viewed in the context of an effective supervisory system, which should be able to detect early warning signs of institutional failure and move quickly to isolate and resolve the problem. What is most heartening about this picture is the assessment that these various structural changes can be put in place within a relatively short time-frame, as they basically involve the strengthening and reinforcement of already existing tendencies.

In dramatic contrast, the CRB situation shows up the villainous side of the Indian financial sector. And, if one listens to a wide enough range of opinions, there appear to be any number of villains lurking in the shadows. There is Mr Bhansali himself, the prime architect of a system that lured innocent investors by dangling the bait of high returns