The RBIís self-serving bid?


We need a single financial regulator, but it's not the RBI's job ó framing monetary policy and regulating financial institutions require different skills

The RBI has asked the finance minister to amend the Reserve Bank of India Act, to allow it to supervise non-bank subsidiaries of banks. The other regulators should, according to the RBI, be relegated to advisory functions. Doing this would constitute a major change to existing financial laws. This financial reform would be a significant step in moving India towards a single financial regulator, and towards making the RBI that regulator.

While there is a strong case for a unified regulator, the task of financial regulation should be separated from the job of conducting monetary policy. This would give an independent central bank doing monetary policy (and nothing else), and a unified second agency doing all financial regulation and supervision.

The present regulatory architecture in India consists of multiple sectoral regulators who each regulate banks, securities, pensions, insurance and commodity derivaties. The RBI has argued that while a bank is regulated by the RBI, its subsidiary ó a brokerage, its insurance arm or its pension business, bring risk onto its balance sheet. As financial firms have become larger and more complex, it is necessary for the bank regulator to control the balance sheet of the entity as a whole, including its subsidiaries. It has cited turf conflicts with SEBI on treatment of a brokerage subsidiary of a bank.

If the regulation and supervision of banks and all bank subsidiaries were done by the RBI, this would make it the single unified regulator of Indian finance, to a substantial extent. This is unlikely to go down well with other regulators or with the government. The RBI does not have skills required to regulate other sectors, and is treading on turf that others covet. The finance ministry, meanwhile, has set up the Financial Sector Law Reforms Commission (FSLRC), headed by Justice Srikrishna, to propose changes to financial sector laws including issues of regulatory architecture. The pre-emptive move by the RBI to usurp the powers of other regulators and make itself a super-regulator is, hence, inappopriate.

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