Tough regulation seen as key to India’s success

Speakers at Risk India 2011 believe a sound regulatory foundation is the basis for containing risk and ensuring steady growth in new markets and instruments in India.

Rabi Mishra, of the Reserve Bank of India, gives his opening address at Risk India 2011

The risk management, derivatives and regulation fraternity gathered for Risk India 2011 in Mumbai on June 20 to debate topics ranging from the regulatory landscape in India; qualitative versus qualitative approaches to managing risk; and new market developments, such as the emergence of exchange-traded funds (ETFs) and credit derivatives in the country.

Rabi Mishra, chief general manager of the financial stability unit at the Reserve Bank of India, used his opening address to warn that taking on risk does not automatically result in higher returns. “While one has to assume some risk to realise the reward, more risk doesn’t necessarily mean more rewards because some risks are not compensated,” he said.

Mishra added that the analysis of risk and return is increasingly becoming a part of psychological rather than numerical science. He added that during a given point in a cycle “the most profitable traders are likely to be those that come in the latest cycle” but pointed out that over time these same traders “are often the worst players”.

One of the most interesting panel sessions of the day was entitled, Are current regulations a help or hindrance?. It led to a broad discussion of the cautious regulatory landscape in India that shielded her from the severest repercussions of the credit crisis.

Jagan Mohan, deputy general manager of the financial stability unit at the Reserve Bank of India, argued the global financial crisis demonstrated the need for macro-prudential regulation, as opposed to the micro-prudential supervision of individual transactions and institutions.

“In India we had strong macro-prudential regulation, therefore we didn’t experience the worst effects of the financial crisis in 2007/08,” said Mohan. “Simple things such as how much exposure a bank can have against a mutual fund, information about transactions in different market segments, the centralised nature of trade repositories – all these factors were taken care of before the crisis.”

Lav Chaturvedi, chief risk officer at Reliance Capital, stated that regulation will help India to create sustainable growth, with the International Monetary Fund expecting India’s GDP to grow 8.2% this year and 7.8% in 2012 – although there are concerns about inflation, which rose above 9% at the end of June.

Responding to some parties that supervision in the country is too tight and is stifling competition and market development, Chaturvedi argued India has no choice.

“With the velocity of the changes there might be challenges, but in a few years India will come out as a more robust, resilient and mature financial services sector compared with the rest of the world – and that’s the only way to do things,” he said. “As the second-largest growth economy, we have to keep up to date and ensure there’s quality growth – not just quantity growth.”

Chaturvedi also pointed out that India has a chance to learn from the European and US experiences of post-crisis regulation, where different strands of reform have frequently ended up in conflict. He gave the example of banks being pushed towards long-term funding at the same time that insurance companies – the biggest buyers of bank debt – are being dissuaded from buying long-term paper by the incoming Solvency II rules.

“In India we can learn from how developed markets are addressing these issues,” he said. “Whenever the rules of the game change there will always be some challenges ahead. But hopefully things will fall in place with the market maturing.”

Other panellists commented on the benefits of regulation when companies experience rapid growth. “Regulation is very much required when firms become larger, as this can create cross-market impacts in the event of a collapse,” said Rama Vasantharajan, head of compliance and risk management at Birla Sun Life Asset Management. “Each organisation today is growing across borders and each entity is adopting strategies across different lines of business.”