‘Financial structure is not strong enough to meet future needs’

BN Srikrishna,chairman of the Financial Sector Legislative Reforms Commission (FSLRC),in an interview to George Mathew,speaks about the need to overhaul the financial system and the recommendations the commission has proposed. Excerpts:

What’s overarching objective of the Commission and its proposals?

There is a strong feeling that the financial structure is not sufficiently strong enough to meet the needs of the coming years. Some of our laws are old and date to the 19th century. Take the RBI Act that was enacted in 1934. Not much has been changed and RBI has been carrying on. It is like the Ambassador car. No doubt,it will run on its four tyres,but if you want to be the best and compete with the best in the world,this is inadequate. You can’t repair one part here or there. You have to change the whole financial architecture.

Do you think there is the political will and consensus among the regulators to reform the system?

I don’t know whether there’s consensus or not. We have done the work. Any government can examine it on merit and accept it or not. It is possible to do it in two years provided you change your mindset.

What is the idea behind the proposal to subsume Sebi,IRDA,FMC and PFRDA and form a unified regulator?

Each regulator has a narrow view of the sector it regulates. Apart from this sectoral approach,regulators also fight between themselves. The financial product seller coming to the market is smart. If he thinks the regulator in sector A is tough,he will make his product appear in sector B. They can always juggle around. This is called regulatory arbitrage. If you have a unified regulator,this can’t happen as everything is controlled by one regulator.

There’s disagreement among members of FSLRC on the government handling inflows and RBI managing outflows.

Isn’t the government handling the inflow now? Who is deciding the FDI policy? There’s confusion on inflows. You have the Foreign Investment Promotion Board,finance ministry and other departments. Then there is the RBI and the Enforcement Directorate. For an investor it is totally confusing. Ultimately,it is the government’s call whether there should be capital inflow or not. Nobody can take that away. The government can frame rules in consultation with the RBI,which can be in charge of implementation. Conversely,the RBI should be in charge of outflows as,according to it,there will be impact on the monetary policy. Today,there is utter confusion.

There is a dissent note from FSLRC members on taking NBFCs and housing finance companies out of RBI purview. What’s the logic behind this proposal?

NBFCs (non-deposit taking) borrow funds from banks and lend it to others. The purpose of regulation is to ensure the interest of the consumer. If the NBFC is borrowing from banks and lending it somebody,where’s the question of cheating the public? Conversely,if the NBFC is accepting deposits,you must make sure that the deposits are returned with appropriate interest. Such NBFCs should take banking licences and the RBI will have control over them. If the NBFC doesn’t accept deposits,I don’t understand why the RBI should be interested in it? Today there are companies whose exposure to banks runs into huge amounts. Does that mean the RBI should regulate such companies too? No. I don’t see any logic in it.

Why did you propose that SBI and LIC be brought under the Companies Act?

The idea is that there should be level playing field. We want every entity in the financial sector to be regulated with ownership neutrality. Today there is one rule for public sector companies,one rule for private companies and one rule for foreign companies. Why should there be special favours? All this was good when the state was controlling the economy. We have moved away from that and must get rid of that thinking.

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