Every year, a few days after presenting the Union Budget, the finance minister meets the country’s chief money man, the governor of the Reserve Bank of India (RBI), and its central board. Pranab Mukherjee addressed the RBI board for the first time in 1982 as finance minister in the cabinet of then prime minister Indira Gandhi. This time around, in his interaction with 15 directors (RBI’s central board has 19 members but four of them, including Kumar Mangalam Birla, chairman of the Aditya Birla Group of companies, were not present at the 11 July meeting), Mukherjee treated the annual ritual differently and flagged off quite a few critical issues involving RBI.
The finance minister made it clear that he is not a believer in the UK’s Financial Services Authority model of supervision, but called for better coordination among all regulators in the Indian financial sector. He also spoke about bringing all financial market regulations under the capital market watchdog, the Securities and Exchange Board of India (Sebi) and setting up a separate public debt office, relieving RBI of its role as the investment banker for the government. Finally, he pointed to a few grey areas in financial sector supervision. For instance, there is no regulation to supervise non-banking finance companies in India and RBI manages them through “directions”. Similarly, the Reserve Bank of India Act, 1935, that governs the 74-year-old Indian central bank, is silent on the critical aspect of “financial stability”.
Mukherjee’s observations have created quite a flutter in the staid RBI bureaucracy and even some outsiders are seeing in them a conspiracy to demolish a great institution with impeccable integrity.
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I am sure no one can find fault with Mukherjee’s suggestion for better coordination among regulators. Including the ministry of finance, which informally plays the role of a super regulator in India, there are some 10 regulators in the financial sector. RBI oversees commercial banks and a few other financial firms; Sebi regulates capital markets and supervises stock exchanges, asset management firms, brokerages, and so on; the Forward Markets Commission supervises the commodities markets, the Insurance Regulatory and Development Authority is the watchdog of the insurance business; the Pension Fund Regulatory and Development Authority oversees the pension business; the National Bank for Agriculture and Rural Development (Nabard) supervises regional rural banks; the National Housing Bank (NHB) regulates home finance firms; the Registrar of Cooperatives is a joint regulator for cooperative banks; and the government’s department of company affairs regulates the deposit-taking activities of non-financial companies. If not for anything else, only to prevent regulatory arbitrages by smart players, these bodies should talk to each other regularly and not waste time in turf wars.
The debate on RBI’s role as the government’s debt manager is intensifying with the widening of the fiscal deficit. To bridge a fiscal deficit, estimated at 6.8% of gross domestic product, the government needs to borrow Rs4.51 trillion from the market in fiscal 2010 and many believe that an independent debt office should manage the borrowing. But there are others who strongly feel that RBI should remain the government’s debt manager when the borrowing is high because the government, being majority owner of 80% of the banking industry, will end up arm-twisting public sector banks to buy bonds if it runs an independent debt office, making for a greater conflict of interest.
If indeed the debt management function is taken away from RBI, I don’t think it will be a big loser as now it manages some 25 functions and each can be independently run by an institution. In the past, at least five institutions have been carved out of RBI—NHB, Nabard, Exim Bank, Industrial Development Bank of India (the earlier avatar of IDBI Bank Ltd) and Unit Trust of India—and the debt office will be yet another such body.
RBI should not bother much about losing its debt management function, and instead focus on changing the organization to be in sync with the new global order. US-based economic think tank National Bureau of Economic Research (NBER) finds RBI the least transparent of central banks in South Asia. While the transparency level in other countries, including those in South Asia, increased over the years, that of RBI remained the same through 1998-2006, says the latest NBER study. The findings echo those in the Country Report on India published in February 2008 by the International Monetary Fund, which criticized RBI’s lack of transparency.
RBI also does not practice what it preaches to commercial banks. For instance, it forced banks to adopt core banking solutions to integrate all their branches on a common technology platform many years ago for customer convenience and better business management, but its own 22 regional offices work as islands with no technology integration! Similarly, not too many insiders talk glowingly about its human resource policies. It has lowered its employee strength from 37,000 to 20,000 in the past 25 years, but only one-fourth of these employees are involved in central banking.
Progressive central banking is impossible with this skewed structure and a look at its transfer policy (or the lack of it) makes one convinced that it does not believe in creating skill and specializations. When did we last see any seminal work done by any of its research wings? Finally, governors come and go but a few of its central board members remain there for decades. How can it talk about corporate governance in regulated entities? RBI needs new clothes.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email comments to firstname.lastname@example.org