The panel has recommended that "sufficient precautions, especially in the realm of devising regulatory mechanisms for consolidated supervision, should be taken diligently".

In its eighth report on "Financial institutions - objectives, performance and future prospects", tabled in Parliament last week, the committee recognised the need for diversification by FIs into new areas like working capital finance, retail finance and insurance, etc.

However, it expressed the view that there are a number of private players infusing "sufficient competition" in the retail finance segment, "compared to a few institutions engaged in long-term finance where the risks associated with it and the repayment period is on the higher side".

Though unbridled entry of FIs into retail business may result in improved bottom lines for these institutions "since such retail financing is considered more profitable and less risky", but in the long run it might result in causing shortage of long-term funds for projects especially in infrastructure, it apprehended.

It has, therefore, recommended that the government and the Reserve Bank of India should ensure that these institutions are not allowed to enter into retail financing "to such an extent" that they are not able to discharge their primary role of meeting the long-term resource needs of industry, for which they were originally set up.

In a related observation, the committee has suggested the RBI be bestowed with adequate powers to regulate FIs more rigorously. It has noted that in the light of relaxation of lending norms and patterns of FIs and banks, allowing them into each other's domains, like banks extending long-term advances and FIs providing working capital loans, the "impending implementation" of the universal banking concept, where ultimately there would banks and restructured non-banking finance companies, "effective supervision seems to be essential".

In its reply to the panel's queries on supervisory and other issues, the RBI has stated that the powers endowed on it vide sections 45K, 45L and 45N of the Reserve Bank of India Act, 1934, with respect to supervising FIs are limited.

It has sought enabling provisions to prescribe cash reserves and maintenance of liquid assets by FIs, powers to control advances granted by FIs, appointment/removal of auditors of financial institutions s, powers to inspect FIs, follow-up and issue directions based on inspection reports under sections applicable to banks, powers to give general directions to FIs and appoint managing directors, or to remove managerial and other personnel, if necessary, in the interest of the financial institutions I and the larger public interest.

The government in its response has stated that the matter is being examined.