Will Pranab Mukherjee address any of the long-pending issues of the financial sector on 26 February when he presents the Union Budget? Frankly, not too many people are expecting the finance minister to do so. “There’s no point talking about banking and insurance reforms because we are being hypocrites,” says J.M. Garg, chairman and managing director of Corporation Bank, and his comment sums up the collective frustration of the Indian financial sector. Successive Union budgets have promised reforms, but very few of them have been kept. Some of the reform proposals are, in fact, a decade old.
Mukherjee does not believe that the budget is a platform for big-bang reform announcements, but he is capable of surprising us. His meeting with the Reserve Bank of India’s (RBI) central board last year is testimony to this. Every year, a few days after presenting the Union budget, the finance minister meets the governor of RBI and its central board. Mukherjee treated the annual ritual very differently and came up with some radical ideas.
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He made a very strong pitch for 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 merchant banker for the government. He was also meticulous in pointing out the grey areas in financial sector supervision. For example, there’s no regulation to supervise non-banking finance companies in India and RBI controls them through “directions”. Similarly, the Reserve Bank of India Act, 1934, that governs the 75-year-old Indian central bank has no reference to the critical aspect of “financial stability”. Finally, Mukherjee called for better coordination among all regulators in the financial sector.
This is the most significant part of his address to RBI’s central board. If one includes the ministry of finance, the de facto super regulator, there are some 10 regulators in the financial sector. RBI oversees commercial banks and other financial firms; Sebi regulates capital markets and stock exchanges, asset management firms, brokerages; the Forward Markets Commission looks after the commodities markets; the Insurance Regulatory and Development Authority (Irda) is the watchdog of the insurance business; the Pension Fund Regulatory and Development Authority (PFRDA) 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 (RoC) is a joint regulator of cooperative banks; and the government’s department of company affairs oversees deposit-taking activities of non-financial companies.
RBI governor D. Subbarao does not see any merit in bringing all financial market regulations under Sebi’s fold. Similarly, Sebi does not see any logic in insurance firms hawking unit-linked insurance plans, or Ulips, that mimic mutual funds. The capital market regulator has sent a show-cause notice to all life insurance companies, including state-owned Life Insurance Corp. of India, asking them to explain why they hadn’t taken its approval before launching Ulips. Irda has hit back, challenging Sebi’s authority and dubbing the show-cause notice “misconceived on conceptual, legal and structural ground”.
Ulips are hybrid products and the premiums collected from Ulips are predominantly invested in equities and bonds while a portion of the fund is kept aside as insurance. Returns on Ulips depend on the market value of the securities in which the premium money is invested. Sebi’s argument is that since Ulips generate a return on investment, they are similar to collective investment schemes such as mutual funds. But Irda’s stance is equally strong: since Ulips also provide mortality benefits, along with returns on investments, the product should continue to remain under the insurance regulator’s jurisdiction.
Better coordination among financial sector regulators alone will not solve such disputes because the root of the problem lies elsewhere. In fact, there is already an established forum for the regulators, called the high-level coordination committee on financial and capital markets. The governor of RBI, the chiefs of Sebi, Irda, PFRDA and senior officials of finance ministry constitute the committee, which meets periodically to discuss critical issues that confront the financial sector. But no amount of coordination can help defuse turf wars among regulators unless the Acts that govern the regulations are given a contemporaneous outlook. The conflicts originate from the legislation that governs the regulations and not the regulators.
RBI was established in April 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Act that governs the insurance industry was passed in 1938. Sebi came into being in April 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992, and PFRDA is the youngest of the lot, established in August 2003 to promote old age income security by establishing, developing and regulating pension funds. Having originated at various periods, these items of legislation address different realities and often contradict each other; regulatory coordination cannot overcome these conflicts. We won’t need sweeping changes and an omnibus Act to bring regulation of the financial sector under one umbrella, but the existing laws can be revisited to iron out the discord and make sure that they operate in harmony. That’s possibly the best way to take care of turf wars among regulators and I won’t be surprised if Mukherjee takes note of this in his Budget.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at firstname.lastname@example.org