Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Indian government clings to obsolete categories of financial intermediaries

As I read the Economic
presented by the Indian government today, I was struck by
how the government is still clinging to obsolete categories of financial
intermediaries. In Chapter 5 (paragraph 5.61), the government
classifies financial institutions into (a) term lending institutions,
(b) refinance institutions and (c) investment institutions.

This looks fine except that investment institutions refers to
public sector insurance companies and not to mutual funds, venture
capital funds or other true investment institutions. What is worse is
that the private sector insurance companies are not included in this
list but are discussed in a separate section on insurance

The table on the next page (after para 5.64) is even more
hilarious. The data on term lending institutions in this table
includes SIDBI which is classified as a refinance institution in para
5.61. The table also includes a separate row for specialized
institutions which includes a couple of venture capital companies but
not all the SEBI regulated venture capital funds.

The entire classification is completely useless. During the mid
1990s, the entire category of financial institutions became
increasingly anachronistic. However, more than a decade later, the
government clings to this obsolete category.

Other countries have similar problems though perhaps not as
ridiculous as this. In the US before the crisis, Countrywide was
classified as a thrift but has now become part of a bank (Bank of
America). Goldman Sachs was a Consolidated Supervised Entity (CSE) and
has now become a bank holding company.

Even if we cannot bring sanity into our balkanized regulatory
frameworks, can we not use sensible classifications when collecting
and presenting statistical data?


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