Global Economy

RBI shifts towards principle-based regulatory approach, focusing on flexibility and customer protection

The Reserve Bank of India is moving towards a principle based regulatory regime that would provide broad directions to those it regulates, but it would ensure that different players are treated differently depending on their kind of activities, said Deputy Governor Rajeshwar Rao.

“The Reserve Bank, as a matter of policy, has been gradually giving banks greater operational freedom to conduct their business operations within the overarching regulatory framework. We are thus moving at a good pace towards making our regulations increasingly principle-based,” Rao said Thursday.

Principle-based regulation gives regulated entities a general direction, without specifying the precise route to be taken.

Rao said that principle-based regulations allow entities the flexibility to adapt to evolving circumstances and to innovate. However, this would need greater clarifications, illustrations and guidance notes to make the regulatory expectations clear to the entities it governs.

“It also requires them to exercise prudent judgment and make responsible decisions,” the Deputy Governor said at the Gatekeepers of Governance Summit organised by ‘Excellence Enablers’ in Mumbai.

In the whole scheme of things, customers remain at the heart of any regulation, Rao said.He added that the two primary objectives of regulation, that is ensuring financial stability and protecting customer interest, leads to two broad categories of regulations – prudential regulations and conduct regulations. “Prudential regulation builds the foundation for financial stability, while conduct regulation lays the ethical foundation for maintaining customer trust, together helping safeguard the integrity of our financial system,” he added.Framing regulations in today’s dynamic and interconnected world is a challenging task, especially because the newer business models are often exploiting the gaps in existing regulations or conducting business operations that fall in a regulatory grey area. Regulatory intervention is needed to protect “gullible” consumers from exploitation.

To the regulator, the dilemma lies in deciding the extent of intervention to restrict the customer abuse without significantly altering the nature of FinTech led innovation.

RBI envisages to make forward looking, risk-based and proportionate regulations and implement them in a consistent manner.

“At the same time, we are conscious that the process of regulation making must yield a net surplus for the financial system. Even as we move forward on these lines, we need to remain steadfast in our dedication to maintaining stability, fostering growth, and safeguarding the interests of customers,” he said.


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