(Current Affairs) Dialogue India: Indian Economy - Major Issues 17 to 29 June 2010

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(Current Affairs) Dialogue India: Indian Economy - Major Issues 17 to 29 June 2010

CAG Weekly
(Current Affairs & GK)
By Om Prakash (Goldy sir)

IrDA vs sebi

• IrDA scores ahade
• Through an ordinance issued on June 18, the Central government amended, in one stroke, the Reserve Bank of India, Insurance, Securities and Exchange Board of India and Securities Contract Acts just to clarify that unit-linked insurance products come under life insurance business. This 90-degree tilt towards the Insurance Regulatory and Development Authority would have taken many by surprise.
• The government's action was perhaps influenced by the fear that any dilution of IRDA's control over ULIPs might adversely affect the stock market sentiment. What is the origin of this unit-linked insurance, the focus of the current unseemly dispute between two regulators?
• Unit-linked insurance was introduced in the 1950s in the U.K. — not by the life insurance industry but by unit trusts. Life insurance companies entered the field only in the 1980s. Between 1990 and 1999, new premium income under life insurance (both linked and non-linked) grew at an average rate of 17 per cent, an impressive performance in a country with a high level of insurance penetration.CAG and psychology classes by om prakash(goldi sir), contact-9911664502.
• This growth was aided mainly by buoyant market conditions, with the FTSE Index (U.K.) moving from 2144 to 6930 in nine years, an average growth of 14 per cent. However, this growth in FTSE, fuelled mainly by speculation and sentiment, could not be sustained and the index began falling. Now, more than a decade later, it is still well below the peak reached in 1999. Perhaps, as a consequence, the unit-linked insurance market has also not shown much growth.
• The traditional insurance market is a shambles as insurers are not interested in marketing a class of insurance under which shareholders bear a major portion of the investment risk but get only 10 per cent of the profit. In the case of unit-linked insurance, while the entire investment risk is passed on to policyholders, the entire profit goes to the shareholders.

IRDA will regulate ULIP schemes

• The Central Government on Saturday ended a two-month-long turf war between the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI), saying unit linked insurance products (ULIPs) will be regulated by the IRDA.
• SEBI in April took the market by surprise when it banned 14 life insurance firms from issuing fresh ULIP schemes. However, the IRDA asked the life insurers to ignore the SEBI order and the matter then went to the Finance Ministry, which advised them to move the court and in the meanwhile had asked them to matain status quo. ULIPs account for more than 50 per cent of the life insurance business and the money collected is invested in equities.
• The committee on hybrid products will include Finance Secretary, financial services secretary and heads of RBI, IRDA, SEBI and the Pension Fund Regulatory and Development Authority (PFRDA).

Financial inclusion and regulation

• The case for financial inclusion, which means providing financial services to the vast sections of the population not covered by the formal banking system, is very strong.
•  In India, it implies providing access to a bank account backed by deposit insurance, access to affordable credit and the payments system.
• For a number of reasons, it is the banks rather than the non-bank intermediaries that should take the lead.
• The financial agencies operating in the unbanked areas of rural India have not been equal to the task and in any case they offer a limited range of activities compared to banks.
• If financial intermediaries have to deliver affordable services, they need to scale up and use technology for which they require large capital. It stands to reason that lenders and investors will repose greater trust when the entity is regulated. And when it comes to credibility, banks score because they are tightly regulated. Recent experiences in India and elsewhere also show that regulation and financial inclusion far from working at cross purposes can go hand in hand. In fact, a number of inclusive practices have been fostered by the regulator, the Reserve Bank of India.
• Priority sector lending mandated by the central bank has financial inclusion as one of its objectives. Licensing laws have been tweaked to persuade banks to open branches in remote areas. Since access to a bank deposit is considered a public good, the RBI has directed all banks to open “no-frills” accounts, characterised by low minimum balances and charges, but limited facilities.
• To further improve the access, the RBI has licensed business correspondents and other agents to undertake branchless banking. Newer regulatory guidelines, especially the Know Your Customer (KYC) norms, have stood in the way of financial inclusion because low-income earners and migrants rarely have acceptable identity papers.
• While the KYC rules have been relaxed selectively, the issue is yet to be fully addressed. Over the medium term, it is hoped, banks will rely on the Unique Identification Numbers (UID) to comply with the KYC rules.
• Technology is critical for the spread of banking among masses because it carries the promise of reducing transaction costs. By leveraging Indian strengths in mobile telephony with the UID, the reach of banks can be increased manifold. Yet technology has to be harnessed in a way that will benefit all types of customers. The benefits of inclusion will be nullified if technology creates a wall between the customer and the bank

Fuel price deregulation is here to stay

• Even as it has gone for total deregulation of petrol price, the government is not far from entirely linking diesel price to international rates.
• At current prices of international crude, petrol price has been increased by Rs.3.50 a litre. For diesel the hike is Rs. 2 a litre, which is around Rs.1.50 less than the market-linked price.
• Before the revision, oil marketing companies (OMCs) were making under-recoveries of Rs.3.73 a litre on petrol, Rs.3.80 on diesel, Rs.17.92 on kerosene, and Rs.261.90 a cylinder on domestic LPG.
• Now, there will no be under-recovery on petrol, but the OMCs will still incur a loss of around Rs.1.50 and Rs.15 a litre on sale of diesel and kerosene, and Rs. 227 on a cylinder of LPG.
• The Empowered-Group of Ministers on deregulation, headed by Finance Minister Pranab Mukherjee, went ahead with partial implementation of the Kirit Parikh Committee report. The committee favoured an increase of Rs.100 in the price of an LPG cylinder and of Rs. 6 a litre of kerosene.

Courtesy: Dialogue India

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