MUMBAI: To provide regulated entities with greater operational flexibility and allow them to tailor their activities to specific needs, the Reserve Bank is gradually shifting towards principle- and outcome-based regulations, a senior central banker said.
“The Reserve Bank is gradually shifting towards principle and outcome-based regulations, as it gives operational flexibility to regulated entities for conducting their operations and tailor their activities to their unique needs, while adhering to the regulatory framework for delivering the outcomes expected from them,” the senior-most deputy governor M Rajeshwar Rao was quoted as saying in a speech delivered at the Indian Institute of Management Kozhikode on Monday. The speech uploaded the speech on its website Wednesday.
Admitting that there is no perfect regulatory approach, Rao said though principle and outcome-based regulation is found to be more suitable for mature markets, even developed economies use rule-based framework when it comes to safeguarding interests of consumers.
Regulators should also have a broader vision of enhancing compliance to make it easier for regulated entities to comply. This can be done by simplifying regulations, enhancing their clarity and removing redundancies and duplications.
The deputy governor noted that regulators are often confronted with complex challenges while framing regulations, necessitating adoption of a forward-looking approach while addressing emerging risks calls for nuanced and adaptive strategies to ensure resilience.
“Regulators must adopt a more proactive mindset to help build a financial system that is both resilient and adaptable. Being proactive entails embracing innovation and fully leveraging data and technology,” Rao who is no this third one-year extension, said.
He further said regulators need to further leverage technology to enhance their efficiency, both internal and supervisory, carry out regulatory horizon risk-scanning and boost regulatory effectiveness.
When it comes to technology adoption, he said using rapidly evolving technologies and collaboration with domain experts is the need of the hour for the regulators to stay abreast of the evolving changes in the financial system.
The RBI has been emphasising on clarity in regulations and has started including examples, FAQs, and illustrations as part of its regulations for the benefit of regulated entities, he said, adding, “we need to consider the impact regulations can have on one of the most important stakeholders in financial system i.e., consumers. Regulators have remained conscious of the need to empower consumers and safeguard their interests”.
The deputy governor also emphasised that financial sector regulatory policies must strike an optimal balance between the critical need for stability and objectives of fostering innovation, efficiency, and competition. While it is necessary to minimise systemic risks and protect consumers, it should not discourage creativity, innovation, or healthy market dynamics, he added.
On the other hand, an overemphasis on innovation and competition, without adequate safeguards, can lead to financial instability, resource misallocation, and ultimately loss of confidence in the system, he warned.