Following are the excerpts from the interview:

On the draft proposals of the "discussion paper":

The Reserve Bank has in principle accepted most of the recommendations made by the Khan Working Group (KWG) and the Narasimham Committee on introducing a seamless financial system in the country.

While agreeing to the broader issue of a progressive move towards universal banking andthe development of an enabling regulatory framework for the purpose, the RBI has mooted a five-year target for the same, to enable development of capital markets and the project-appraisal capabilities of banks.

However, these arguments are not really valid.

The essence of this discussion paper is that the RBI will not set guidelines and stringent time-frame for transformation. Instead, it has preferred to work out the transitionary arrangements on a case-by-case basis, and give freedom to DFIs to transform into a bank, as and when they demonstrate their capacity and the willingness to conform to the total regulatory framework of a bank.

On transformation in the role of DFIs:

The Reserve Bank has suggested various options for such transformation, which include setting up of subsidiaries, in-house commercial banks, or become a restructured non-banking finance company if they continue to do what they are doing now.

However, no new NBFC norms are envisaged at this stage for these transformedDFIs, which currently conform to comparatively more stringent regulations. While the existing NBFC norms will give DFIs freedom to raise and deploy resources, they will now be subject to SLR and other such norms applicable to the NBFCs.

In my opinion, DFIs will prefer the banking route, albeit slowly, because they need to first build the expertise in working capital financing, develop a network to mobilise low-cost resources, etc. All these will lead to mergers and realignment of forces in the financial sector.

On debt market and inevitability of mergers and acquisitions:

The discussion paper suggests that development of debt market should be a prerequisite for such transformations. However, it is silent on removal or rationalisation of stamp duties, retailing of debt products, increasing the depth and liquidity of the market, etc. which are very pertinent issues.

The long-term debt market may, therefore, take another five to seven years to develop, but for the DFIs to wait that long will putthem at a comparative disadvantage and deny them the economic efficiency arising from lower costs, higher output and better products.

In fact, mergers and acquisitions provide them with a faster route to develop expertise, ensure spread and mobilise low cost retail deposits. But this too requires some regulatory changes concerning closure of branches or offering VRS to some employees in a post-merger scenario.

On the role of a super-regulator:

A super-regulator is required for a uniform regulatory framework and it should be not be involved with the supervisory duties. Ideally, the Reserve Bank could perform the role of super regulator, alternatively the RBI governor could be the chairman of such an agency. This will enable proper coordination between the regulators, supervisor and the players, and ensure uniformity in regulations for players engaged in similar activities, without giving any regulatory advantage to any category of players.