The Reserve Bank of India (RBI) has differed with the International Monetary Fund (IMF)’s observation that there are some limits on the independence of the banking and insurance regulators of the country.
In the Financial Sector Stability Assessment for India report, IMF identified some gaps, including in international and domestic supervisory information sharing and co-operation and consolidated supervision of financial conglomerates, and some limits on the de jure independence of the regulators (RBI and the Insurance Regulatory and Development Authority--Irda).
In its response, the central bank has made it clear that there is no interference in the functioning of the regulator.
“With regard to the de jure autonomy of regulatory bodies, it merits consideration that financial sector regulators in India operate within statutory frameworks that prudently balance the role of the government in policy-making with autonomy and independence for regulatory bodies to transparently perform regulatory functions through exercise of statutory powers,” RBI said today.
“The de facto position, too, reveals no interference in the functioning of regulators. Steps are under way to accord a statutory basis to the pensions regulator also,” it added.
According to RBI, efforts are being made to further strengthen the statutory framework and the Financial Sector Legislative Reforms Commission (FSLRC) has been set up by government, which is expected to give its report by March 2013.
Irda has also defended itself saying it has complete oversight over the Life Insurance Corp of India (LIC) with regard to both market conduct and prudential regulations.
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Irda’s statement comes amid its differences with the finance ministry over LIC’s equity exposure limit in a single company. Despite Irda’s discomfort, the ministry is set to increase LIC’s single company equity exposure limit to 30 per cent from 10 per cent, which is applicable for all other life insurance players.
The central bank, however, admitted that banks in India enjoyed higher group borrower limit compared to international standards. But RBI has justified the practice on the ground that since some of the major corporate groups are key drivers of growth of the Indian economy, and keeping the limit at the level of the single borrower limit would severely constrain the availability of bank finance, which would hamper the growth of the economy.
The central bank has also said it is in talks with the government to amend laws so that it do not have to appoint its officers as nominee directors on banks’ boards.
“RBI recognises that there could be moral hazard issues posed by the appointment of an RBI officer as a nominee director on the banks’ board. RBI is sensitive to the issue and has taken up the matter with the government of India for amendment of the enabling legal provisions,” it said.
At present, RBI appoints its nominee in all the public sector banks’ boards.
Though the central bank has differed on IMF’s observation that the mandatory statutory liquidity ratio of banks hampers monetary transmission, it said steps were being taken to enhance liquidity in the government securities market.