Opinion Turning off the regulator
Are recent moves from New Delhi threatening regulators independence?...
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If the Indian banking sector has,over the years,emerged stronger despite political interference at various points in time,a fair amount of the credit must go to the regulator. Today,commentators across the world are applauding the Reserve Bank of India for the way in which has governed the Indian banking system and acknowledging that its conservative approach,although criticised by some,has paid off.
Despite a downturn in the Indian economy,following the global financial crisis which broke out in late 2008,banks in India were never in danger of piling up very large quantities of non-performing assets; at a systemic level,loan losses in recent times have not touched the levels seen historically. Except for a couple of banks that had lent recklessly to retail borrowers,most banks have managed to maintain fairly clean balance sheets that are well-capitalised. At another level,the RBI has been careful about whom it has allowed into the industry; most of those who were given licences in the last round have fared reasonably well with just a couple needing to be rescued.
So,its a pity that the finance ministry,which has been blessed with a good central bank that has kept a watchful eye on the banking system and prevented any major embarrassment or financial problems for the government,should want to undermine its authority. However,following the spat between the Securities and Exchange Board of India or Sebi,and the Insurance Regulatory and Development Authority,or IRDA,over jurisdiction,to which an amicable resolution could not be found,the government has issued an ordinance. It has decided that a joint committee,headed by the finance minister,and comprising all other financial sector regulators and finance ministry officials,will resolve any disputes between regulators.
Since the decisions of this joint committee will be binding unlike those of the High Level Co-ordination Committee (HLCC),which does not have statutory powers the finance ministry now clearly becomes a kind of super-regulator. Fearing that its autonomy is being reduced,the RBI has urged the finance minister to allow the ordinance to lapse.
The RBI is probably concerned that if the right decisions are not taken with regard to regulations and supervision of financial products,it could impact the financial system as a whole. While no government would want to have weak regulations that could trigger systemic risks,the central bank would want to ensure not only that these rules are watertight but also that they are implemented. Also,while the government may consult the RBI,as it would since the RBI would be a member of the joint committee,the central bank believes that the establishment of a statutory joint committee is itself problematic because while the current prime minister and finance minister have strong and impeccable commitment to regulatory autonomy,over the longer term personalities could change. Again,RBI governor D. Subbarao has pointed out that the appearance of autonomy is as important as the actual autonomy itself and the very existence of a joint committee will sow seeds of doubt in the public mind about the independence of regulators.
The central bank is also anxious that a mechanism is being proposed to resolve differences on the regulatory jurisdiction of certain financial instruments exchange-traded instruments like interest rate futures,credit default swaps and currency futures. This is being done through an amendment to the RBI Act. Currently,a joint regulatory mechanism between the RBI and Sebi deals with these; while the broad contours are finalised by the central bank,Sebi registers the exchanges that trade in these. Any new products,such as a rupee-euro contract or a rupee-yen currency future,need the RBIs go-ahead.
Clearly,the central bank is concerned about adverse consequences if regulation is weak for these products and markets because any mishaps could hurt the financial system. Given that the global financial system today is far more dynamic and that there could be volatility in currencies,its understandable that the central bank wants to be cautious that trading in such products will not cause any harm. So far the arrangement between Sebi and the RBI seems to have worked well so there was little reason to alter it and its surprising that the government wants a change. Apart from the dispute over ULIPs,there hasnt been too much confusion over jurisdiction of financial products. So,its probably best that these debates are settled through the HLCC,which can make specific recommendations. Regulation is best left to the regulators.
shobhana.subramanian@expressindia.com
The writer is Mumbai Resident Editor of The Financial Express
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