2 min read.Updated: 10 Jul 2019, 12:48 AM ISTLivemint
Stricter oversight of non-bank lenders should have been instituted earlier. But now that the central bank is being given charge of them, there is no guarantee this will prove enough
It always takes a crisis in India to correct what is egregiously wrong and should have been rectified in the normal course of governance. Corrective measures are always put off till things reach a breaking point or scams become politically suicidal to ignore because of their impact on voters. This has become a recurring and tragic theme in the story of India’s economic reforms, especially in the financial sector. Examples abound: Stock market reforms undertaken only in the aftermath of the Harshad Mehta scandal, the beginning of reforms in non-banking financial companies (NBFCs) after the collapse of CRB Finance, legacy systems in the government securities market upgraded after repeated infractions by brokers, the ongoing saga of bank regulation to deodorize rotten loans, and so on. An additional dimension exists: Operators have exploited cracks between various regulators. In recent times, attention has been drawn to the regulatory mismatches prevailing in the NBFC space only after repeated loan defaults by Infrastructure Leasing and Financial Services Ltd and its various subsidiaries, and the effects on the NBFC sector. Some central investigative agencies even laid part of the blame at the Reserve Bank of India’s (RBI) doorstep. And so change became inevitable once again, which has been delivered in the budget for 2019-20. The government is widening RBI’s regulatory sweep over the NBFC sector as well as housing finance companies (HFCs).
The RBI Act is to be amended to empower the central bank to remove any director from an NBFC’s board, to supersede the entire board and appoint administrators in their stead if need be, to debar any NBFC auditor from auditing RBI-regulated entities for three years, to force an NBFC to merge with another, and to restructure it or even break it up into different entities. Similarly, the government is moving the regulation of HFCs from the National Housing Bank to RBI. As in the past, tightening is taking place on a post facto basis. RBI has been asking for more powers to regulate NBFCs for many years, while the sector has leveraged multiple regulators, including the ministry of corporate affairs and the Securities and Exchange Board of India. But, there is no guarantee that these amendments alone will remedy the situation. One, RBI’s capacity is exceedingly limited and its resources so stretched that even bank regulation has become a casualty; it has to be seen how RBI marshals its resources to discharge its additional regulatory responsibilities. Two, the amendments do not offer any scope for an aggrieved party to appeal against the central bank’s sweeping powers, which is an essential democratic right. Three, and this is important, arming RBI with additional powers perhaps represents a government pushback against criticism over its interference in independent regulatory institutions.
The government has over the years treated RBI’s demands for greater regulatory jurisdiction with some measure of disdain. It has now taken a crisis that threatens systemic financial stability for the government to finally act meaningfully. But even in this moment of remedial action, the government has acceded only partially: RBI is yet to get full regulatory jurisdiction over public sector banks, which own a bulk of the financial system’s assets. Hopefully, the government will not wait for another scandal before it acts.