Mishaps in the financial sector have an uncanny way of occurring in quick succession - capital-market turmoil, co-operative banks' irregularities relating to lending to capital-market intermediaries and gold financing. One view is that regulators should not shy away when an accident takes place and, like seasoned cops, merely clear up the debris and restore the confidence of drivers with a cheery God-speed signal.

It has been argued that the RBI should emulate the (US Federal Reserve Chairman Alan) Greenspan stance of 1987 and pump more liquidity into the capital market. The existence of a few rogue elephants is strangely attributed to the tight-fisted approach of regulators. If only regulators had the courage to open up the credit floodgates, capital market normalcy could be restored. A grateful capital market would then deliver the cherished objective of a booming capital market, higher investment and a 9 per cent real growth rate. Fortunately, our regulators are not dare-devil acrobats and will not opt for such risky responses.

Another view is that with the global integration of capital markets, at least in terms of "sentiment" if not exchange controls, the recent turmoil is all about tracking the Nasdaq and it is otiose to use third-degree methods to locate rogue operators in the stock market.

A third viewpoint is the regulator-bashing approach. It is always the fault of the cops for not having caught the culprit before he committed a murder. If there is a CRB scandal the solution is to create a new institution to regulate and supervise the financial companies. There are incoherent reports (or calculated leaks?) that government is scrutinising the role of market regulators and, in the first instance, the RBI's banking supervision role should be taken away - a la European/UK model - and a new institution set up. As for the cooperatives, ignoring the sound recommendations of the Madhava Rao Committee, all we need to do is strip RBI of its role in the co-operative sector and all will be well.

A fourth viewpoint is that the Indian financial system is afflicted by all these problems because we have too many regulators, and we should set up a jumbo regulator to cover commercial banks, co-operative banks, financial institutions, finance companies, insurance and the capital market. Such a regulator, it is claimed, would insulate the system from all scandals.It is essential for the government to avoid the factious approach of "give me a problem and I will give you a new institution to handle it". It is nobody's case that regulatory/supervisory bodies have no deficiencies. In fact, the world over they have to continually improve their functioning to keep up with emerging challenges. It would be imprudent to remove the regulation/supervision of commercial banks, co-operative banks, financial institutions and financial companies from the RBI. Likewise, it does not make sense to respond to baying that urges using the scalpel on Sebi.

The RBI and Sebi should have no hesitation in tightening up regulating supervision in areas where there have been obvious violations. They should simply ignore criticism that such measures smack of bolting the stable door after the horse has bolted - surely we do not wish to have more horses bolting? More specifically, the RBI should have no hesitation in tightening the norms for direct or indirect lending to the capital market. Sebi should have no hesitation about a well-modulated plan to swiftly move over to a rolling settlement system.

As regards co-operative banks, particularly scheduled co-operative banks, their facilities should be on a par with scheduled commercial banks only if they adhere strictly to the regulatory framework set out for commercial banks. Moreover, the dual problems of control between RBI and state governments should be resolved urgently. The government must remember the old Roman adage: "A slave with two masters is a free man."

The government considers itself the only stakeholder in the banking system by virtue of its ownership. This is clearly erroneous; the real stakeholders are the depositors. The committee to review deposit insurance made a number of salutary recommendations and these should be implemented. Modelled on the US Federal Deposit Insurance Corporation, there should be regulatory/supervisory powers for the deposit-insurance agency. In the Indian system there is a lacuna in that there is no regulatory agency dedicated to protecting depositors' interest. No bank should be able to undertake activity which could remotely jeopardise depositors' safety. The deposit-insurance agency should be empowered to withdraw deposit insurance for banks violating the regulatory framework.

The regime of Prompt Corrective Action, which was set out for consideration a few months ago, should be put in place without further delay. The regulators should be required to disclose adverse action taken by them. When penalties are imposed, however small, they should be publicised. If adverse action is undertaken contemporaneously, all stakeholders would be alerted and there would be early convergence to least-cost remedial action.Regulation/supervision is the toughest job in the financial system and regulators should not hesitate to spend whatever is required to train personnel in this highly skilled and intricate activity. It is here that the central bank has a distinct advantage since it does not face any resource constraints.

In a climate of baying for blood it is necessary to refrain from shooting the cops rather than the culprits. The regulators must remember Shakespeare's words: "Action is eloquence".