Financial regulators including Reserve Bank, and Sebi will meet next month to decide on giving a formal status to HLCC — a co-ordinating body for the sector — to make it more effective.
At present, there is an informal set up between these watchdogs and representative of the Finance Ministry — High Level Coordination Committee (HLCC) — which meets to review financial sector issues.
At its next meeting in mid-November, HLCC will deliberate on giving formal status to make it more effective.
However, regulators are not sure as formal set up can worsen things by creating bureaucratic and procedural hassles in HLCC working.
"The decision to make HLCC more effective would be deliberated on in the second half of November. The discussion is on whether formalisation of HLCC would be more effective or more bureaucratic?" an official source said.
There is a consensus that HLCC needs to be more effective to tackle any problem speedily and with ease as there are many issues in the financial market that require close coordination and acting together by various regulators, the source said.
As of now, the sector has to deal with many regulators. For instance, he said, if mutual funds face liquidity crisis as happened last year following Lehman Brothers' collapse, the step to infuse liquidity would be taken by the RBI, but the information on cash crunch will be known to Sebi first.
"As such, financial sector issues require close co-ordination among regulators," he said.
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However, there is no guarantee that a formal structure for HLCC would make it more effective as it may make it more procedural and bureaucratic.
The liquidity crisis faced by the mutual fund industry last year was addressed in just over six hours over mobile phones through messages between different financial sector regulators.
The RBI had opened a special repo window — liquidity injection by the RBI against government securities — for mutual funds to tide over the liquidity crunch. The crisis was solved in about two months.
As such, the current informal structure of HLCC proved quite effective in handling the MF crisis, he said.
The November meeting will deliberate on whether providing formal structure to HLCC would lend promptness and swiftness to coordination among regulators in salvaging any crisis.
HLCC, an informal panel of various financial sector regulators like the RBI and the Sebi, was formed in 1992 after a Department Order (DO) issued by the then Department of Economic Affairs Secretary Montek Singh Ahluwalia.