Panel for restructuring BFS

quot;It is also inconsistent that with the principles of effective ownership that the regulator 8212; Reserve Bank, even in the interim 8212; is also an owner of banks and financial institutions, and this would require the Reserve bank to divest its holdings in banks and institutions,quot; the report says.

The revamp on the supervisory front is to be concluded within three years, it said. Other key suggestions in the area include the introduction of skilled and specialised staff to deal with a complexsupervisory system. BFS was set up with the idea of supervising the financial system more effectively. Notwithstanding this, the non-performing assets and frauds/scandals involving banks and institutions have not shown any remarkable decline.

In its recommendations submitted recently to the finance ministry, the committee has said that an amendment to Section 58 of the RBI Act, enabling the RBI central board to frame regulations to set up the new board must be taken up. The new entity8217;s sole task will be to undertake the regulation of banks and their supervision, financial institutions and finance firms to quot;ensure soundness of the financial systemquot;.

Five independent part-time members 8212; drawn from banking, accountancy, law, management and modern banking technology, with the RBI governor as its ex-officio chairman 8212; should be set up, the committee says. The CEO of the body will hold the rank of the central bank8217;s deputy governor.

In decision-making, should the majority advice of independent members benot accepted, ex-officio members are to initiated the finance minister of the instance even as the independent members will be entitled to submit reasons for their stand.

Even as the new supervisory body will take action to correct deficiencies, if remedial action is not forthcoming within the stipulated time frame, a written agreement will have to be entered into by the institution and the new board. In case of serious violations, the board will have the powers to issue cease-and-desist orders against the institution or the individual concerned. All penalties and prohibitory orders are also to be made public.

Legislative infirmities are to be corrected forthwith and a penalty slapped the moment a violation has been observed. Reversal of decisions, if any, should be rare. Special staff 8212; commercial bankers, lawyers, chartered accountants, corporate specialists and economists 8212; are to be inducted.

Meanwhile, the panel said the Reserve Bank of India should set up a liquidity adjustment facility LAFunder which the central bank can periodically reset its repo and reverse repo rates.

This, in effect, means that the panel wants the repo rate to become the most important tool for monetary management. The RBI has already done this in the recent slack season credit policy when it made the repo rate both fixed and auction a powerful tool replacing the bank rate. It also introduced a one day repo.

The setting up of a LAF had earlier been advocated by SS Tarapore, chairman of the committee on capital account convertibility and former RBI deputy governor. Tarapore was one of the members of the Narasimham panel.

The LAF, according to the panel, will prevent interest rate movements in the inter-bank call money market to become volatile.