 "Regulators exist only to protect consumers: B N Srikrishna")
The Financial Sector Legislative Reforms Commission (FSLRC) has given far-reaching recommendations to the government that are bound to have an impact on the financial sector. Its proposal for a single regulator, a Unified Financial Agency (UFA) in place of Sebi, Irda, PFRDA and FMC, would draw the ire of existing regulators. FSLRC Chairman B N Srikrishna does not find it a major problem. He tells Vrishti Beniwal that opposition by regulators can't be a basis for dumping the recommendations. Edited excerpts:
Critics say you have copied the unified regulator model from Australia to bifurcate regulatory functions between prudential regulations and customer grievance redressal. They say it will not work for a diverse country like India. How would you justify your recommendation?
The same thing was said about Ambedkar when he drafted the Constitution of India. We did study the efficiently working systems in Australia, Singapore, Canada and the UK, among others. We have adopted the best practices followed globally. What is the rational basis for the criticism? Diversity is no ground. In fact, regulators exist only to protect consumers. Therefore, we have been consumer-centric in our report. Apart from a status quoist mindset, we see no insuperable problems. Perhaps, it is like the wedding blues of a bachelor before the wedding because he thinks he is not yet ready for it!
The Australian model is not a unified regulator model. They have the prudential regulator regulating banks, insurance and pensions, etc, and the Australian Securities and Investments Commission (ASIC) doing conduct regulation. FSLRC's proposal is quite different in that banking and payments system regulation will be done by RBI and all others by the UFA.
Considering that regulators would strongly oppose the idea of a unified regulator that would drastically change the current architecture, do you think it is feasible to implement the recommendations?
Opposition by the regulators can hardly be a ground for junking the recommendations. We heard them all and they did oppose because it affects their turfs. It is for the government to see if the distilled wisdom of more than about 500 experts here and abroad should be dumped merely because the regulators oppose these.
Why didn't you give a time-frame for bringing RBI under the unified regulator?
The time frame depends on how the government wants to go about it. We have shown the path forward and the time frame depends on whether the government traverses the path walking, running, by bullock cart or by a Ferrari. That the situation was not hunky dory is seen from the fact that the government thought it fit to appoint a high-powered commission, with such a wide remit.
You have recommended a monetary policy committee to fix policy rates, but RBI Governor D Subbarao recently said the central bank requires more autonomy for such a set-up. How do you look at his statement?
That was his argument before us, too. But that is not justified. The report does not say RBI has no autonomy but makes it more accountable. In a democracy, all institutions have to be accountable and no one can plead to the contrary on the ground of autonomy. The report has balanced accountability with autonomy. One cannot be at the cost of the other. Autonomy is provided statutorily. Board members and chairman have to be appointed by a rigid process and for a fixed term, and not at the pleasure of the government.
There is no provision for 'directions' in 'matters of policy' as at present, with the government having the last word on what is a matter of policy.
The composition of the monetary policy committee is also provided in the proposed code. Wherever the government has a say, it has to be in consultation with RBI (setting the medium-term objective of monetary policy) and that has to be by a public document and put before Parliament. Thus autonomy of RBI is effectively guarded.
Why have you recommended bringing SBI and LIC under Companies Act and not under Banking Regulation Act and Insurance Act, respectively?
To achieve ownership neutrality and give a level-playing ground to generate more competition leading to greater efficiency. Requiring them to register as companies will not take them out of regulatory purview of RBI.
When Non-Banking Finance Companies (NBFCs) are under the banking regulator in many countries, why do you want to keep NBFCs and Housing Finance Companies outside RBI's purview? There doesn't appear to be a complete agreement on this within the committee itself...
There are many countries where the central bank does not regulate NBFCs. What is the great advantage of keeping them within the purview of RBI? They give credit to sectors where banks under the mandate of the RBI do not. So the NBFC borrows from the bank and gives credit to such sectors. RBI can effectively deal with it in its power to regulate banks. Again, there are several companies whose exposure to banks is far greater than any NBFC. Should the RBI regulate them on that ground? The scenario of NBFCs is quite complex and needs to be streamlined. One way of doing it is by requiring deposit-taking NBFCs to obtain banking licence and putting them under the purview of RBI. That would protect consumers under high intensity promises for deposit taking. Only non-deposit taking NBFCS would be regulated by the UFA.
If the government governs control on capital inflows and RBI does it for outflows as FSLRC report suggested, won't that lead to incoherent policies on capital flows? There are three notes of dissent by committee members, too...
The interesting thing is the dissents are themselves not uniform on the same issue. Apart from that, is there any uniform policy today on capital flows? It is a totally confusing situation as it exists. Chapter 8 of the Report deals with this and enumerates the difficulties encountered today and the rationale for capital controls. We cannot forget that surely a day will come, hopefully in the near future, when capital control will become redundant except on grounds of national security. Why can't it be simplified by making the inflows controlled by government, as it is necessarily politically driven, and make the outflows subject to its control as RBI thinks they may affect the monetary policy objectives?
Critics say you have copied the unified regulator model from Australia to bifurcate regulatory functions between prudential regulations and customer grievance redressal. They say it will not work for a diverse country like India. How would you justify your recommendation?
The same thing was said about Ambedkar when he drafted the Constitution of India. We did study the efficiently working systems in Australia, Singapore, Canada and the UK, among others. We have adopted the best practices followed globally. What is the rational basis for the criticism? Diversity is no ground. In fact, regulators exist only to protect consumers. Therefore, we have been consumer-centric in our report. Apart from a status quoist mindset, we see no insuperable problems. Perhaps, it is like the wedding blues of a bachelor before the wedding because he thinks he is not yet ready for it!
The Australian model is not a unified regulator model. They have the prudential regulator regulating banks, insurance and pensions, etc, and the Australian Securities and Investments Commission (ASIC) doing conduct regulation. FSLRC's proposal is quite different in that banking and payments system regulation will be done by RBI and all others by the UFA.
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Considering that regulators would strongly oppose the idea of a unified regulator that would drastically change the current architecture, do you think it is feasible to implement the recommendations?
Opposition by the regulators can hardly be a ground for junking the recommendations. We heard them all and they did oppose because it affects their turfs. It is for the government to see if the distilled wisdom of more than about 500 experts here and abroad should be dumped merely because the regulators oppose these.
Why didn't you give a time-frame for bringing RBI under the unified regulator?
The time frame depends on how the government wants to go about it. We have shown the path forward and the time frame depends on whether the government traverses the path walking, running, by bullock cart or by a Ferrari. That the situation was not hunky dory is seen from the fact that the government thought it fit to appoint a high-powered commission, with such a wide remit.
You have recommended a monetary policy committee to fix policy rates, but RBI Governor D Subbarao recently said the central bank requires more autonomy for such a set-up. How do you look at his statement?
That was his argument before us, too. But that is not justified. The report does not say RBI has no autonomy but makes it more accountable. In a democracy, all institutions have to be accountable and no one can plead to the contrary on the ground of autonomy. The report has balanced accountability with autonomy. One cannot be at the cost of the other. Autonomy is provided statutorily. Board members and chairman have to be appointed by a rigid process and for a fixed term, and not at the pleasure of the government.
There is no provision for 'directions' in 'matters of policy' as at present, with the government having the last word on what is a matter of policy.
The composition of the monetary policy committee is also provided in the proposed code. Wherever the government has a say, it has to be in consultation with RBI (setting the medium-term objective of monetary policy) and that has to be by a public document and put before Parliament. Thus autonomy of RBI is effectively guarded.
Why have you recommended bringing SBI and LIC under Companies Act and not under Banking Regulation Act and Insurance Act, respectively?
To achieve ownership neutrality and give a level-playing ground to generate more competition leading to greater efficiency. Requiring them to register as companies will not take them out of regulatory purview of RBI.
When Non-Banking Finance Companies (NBFCs) are under the banking regulator in many countries, why do you want to keep NBFCs and Housing Finance Companies outside RBI's purview? There doesn't appear to be a complete agreement on this within the committee itself...
There are many countries where the central bank does not regulate NBFCs. What is the great advantage of keeping them within the purview of RBI? They give credit to sectors where banks under the mandate of the RBI do not. So the NBFC borrows from the bank and gives credit to such sectors. RBI can effectively deal with it in its power to regulate banks. Again, there are several companies whose exposure to banks is far greater than any NBFC. Should the RBI regulate them on that ground? The scenario of NBFCs is quite complex and needs to be streamlined. One way of doing it is by requiring deposit-taking NBFCs to obtain banking licence and putting them under the purview of RBI. That would protect consumers under high intensity promises for deposit taking. Only non-deposit taking NBFCS would be regulated by the UFA.
If the government governs control on capital inflows and RBI does it for outflows as FSLRC report suggested, won't that lead to incoherent policies on capital flows? There are three notes of dissent by committee members, too...
The interesting thing is the dissents are themselves not uniform on the same issue. Apart from that, is there any uniform policy today on capital flows? It is a totally confusing situation as it exists. Chapter 8 of the Report deals with this and enumerates the difficulties encountered today and the rationale for capital controls. We cannot forget that surely a day will come, hopefully in the near future, when capital control will become redundant except on grounds of national security. Why can't it be simplified by making the inflows controlled by government, as it is necessarily politically driven, and make the outflows subject to its control as RBI thinks they may affect the monetary policy objectives?