As RBI Governor, Raghuram Rajan is expected to be all for competition and innovation in the financial system.
This bodes well for all those eager to get a new banking licence and also existing players who want to innovate at the marketplace to reach out to the large unbanked and underserved in the country.
Rajan’s choice as RBI Governor designate is probably the best decision that the Prime Minister Manmohan Singh took during the last four years, is what many bankers say in private. Rajan is not known to many in the Indian polity could be a plus point for him and the country too.
For he can now pursue his work without being under any political influence and do things that would serve India well and purely on economic logic and merits.
He is likely to be someone who will encourage modest and free experimentation of financial products in the Indian market. This is also the sense one gets if one were to go by his recent book ‘Fault Lines’, as a benchmark to his economic thinking.
Rajan will certainly not turn his back to financial innovation, say economists who have closely followed his economic thinking.
But allowing proliferation of innovative financial products may be a doubtful approach during his three year tenure that begins on September 5.
The book, which was published in 2010 on the heels of the global financial crisis, had brought out that it is a competitive system that is likely to produce the financial innovation necessary to broaden access and spread risk.
“The goal of broadening access, to reach new and underserved customers as well as future innovators, requires a financial system that is willing to take reasonable risks, and thus, it requires competition,” Rajan had said.
In this book, Rajan had pointed out that financial innovation span the range from the good to the positively dangerous.
Financial innovation for most observers of financial markets seemed to be synonymous with credit default swaps and collaterised debt obligations, derivative securities that are despised by many outside Wall Street.
Rajan had in ‘Fault Lines’ pointed out that it was innovation that gave the world money-market account, the credit card, interest rate swaps, indexed funds and exchange traded funds.
Many of the financial products – as he points out in the book – are not life threatening, and cannot be understood until tried out.
In essence, there is no need for any total ban on offering a financial product unless it has been vetted, much as the food and drug administration vets new drugs.