Indian policymakers have begun the groundwork for a new architecture to strengthen the countrys financial system, to preclude the possibility of a Lehman Brothers-type collapse of a big Indian financial institution. The High Level Co-ordination Committee on Financial Markets (HLCCFM), which has representation from all financial regulators and finance secretary, is readying a paper that will outline the mechanism to ensure financial stability in the country.

The paper would also look at conglomerates or multi-product financial service providers, say a bank also having an insurance arm or a mutual fund business, as these pose bigger risks to the system than single product service providers, a senior finance ministry official told ET. The paper is expected to be ready in about 2 months, the official said. The panel is also looking at the regulatory framework and working of credit rating agencies and is expected to come out with its report in 3-5 months.

It outline the reforms framework required to insulate the countrys financial system from a meltdown similar to the one in the industrialised world last financial year. There is a view among the policymakers that systematically important financial institutions (SIFIs) would need to be tackled differently to ensure that they do not create any systemic risks for the financial markets at any point in time.

This assessment becomes important in context of the agenda for the next generation financial sector reforms outlined by the Prime Minister Manmohan Singh at the India Economic Summit on Sunday. While making a case for financial sector reforms, he also emphasised that India needs to strengthen its financial system even though Indian banks or financial institutions remained shielded from the global crisis.

..All these issues will be addressed through gradual but steady progress in financial sector reforms to make the sector more competitive while ensuring an efficient regulatory and oversight system, he had said. The government has already began examining the financial system as suggested by Raghuram Rajan, former chief economist at the IMF and currently a special advisor to the Prime Minister Manmohan Singh.

The Rajan committee had suggested that trading in all financial assets should be governed by a single regulator, a fact that was even alluded to by finance secretary Ashok Chawla at a seminar on Wednesday. He also said the government is looking at strengthening HLCCFM to make it more broad-based and effective to deal with issues in the financial sector.

We are just trying to see what is the best method of making it more effective, more broad-based (and) how it should function, Mr Chawla said while ruling out any need to give legal teeth to the committee or a super regulator for financial sector. The HLCCFM is chaired by the RBI governor. It has the finance secretary, heads of Sebi, Pension Fund Regulatory and Development Authority (PFRDA), and Insurance Regulatory and Development Authority (IRDA) as its members.