The Union finance ministry’s relations with the financial sector regulators were once again the focus of attention last week. The ministry named its Financial Services Secretary, D K Mittal, as a government nominee on the board of the Reserve Bank of India (RBI).
That should not have evoked unusual interest if Mittal had been the only finance ministry nominee on the RBI board. Why it had aroused a lot of interest was because Mittal would be joining another finance ministry nominee and Economic Affairs Secretary R Gopalan, who is already on the RBI board.
Will this make any difference? Not much, except that the finance ministry’s oversight of how the central bank functions will have increased as a result. Was that needed or desirable? The answer will be a resounding no, if you ask the central bank or any of its sympathisers. Indeed, the hurried manner in which the decision was taken could make them wonder about the motive or logic of the move.
The ostensible reason for nominating two senior finance ministry bureaucrats on the RBI board is to strengthen the coordination between the central bank and the government. However, that reason does not sound very convincing. Instead, the move seems to be yet more proof of how the government functions at its own pace, making virtually no distinction between what is necessary and what is not. Apparently, the decision to nominate the financial services secretary on the RBI board was prompted by an amendment to the RBI Act along with the enactment of a new law that empowered the central bank to regulate the factoring business conducted by a host of non-banking finance companies and other financial intermediaries.
The amended RBI Act stipulated that an additional finance ministry representative ought to be on the RBI board. Never mind that already there was a finance ministry nominee on its board. Could he have been given the additional responsibility of performing the role assigned to the ministry under the factoring law? Or was it a question of turf within the finance ministry?
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The larger point that nominating two ministry bureaucrats on the RBI board could give credence to the government’s penchant for playing Big Brother to financial sector regulators was overlooked by the finance minister or his advisors. Why this should have mattered is because the finance ministry under Pranab Mukherjee has been engaged in a rather unseemly dispute over regulatory jurisdiction.
The ministry proposal to set up a financial stability and development council in which RBI was equated with all other financial sector regulators was a bone of contention. That dispute was resolved through a compromise formula, but the relations between the ministry and the central bank did not really improve. Now a second finance ministry nominee, though armed with the mandate of an amended law, may escalate tensions again.
The problem has another dimension. The fact is that the finance ministry is uncomfortable in seeing itself just as a shareholder of public sector banks, for whom RBI is the regulator. It has often given the impression of its special shareholder status on the strength of its being part of a sovereign government. So it is not a question of only RBI, all other financial sector regulators also face this dilemma.
For chief executives of public sector banks, this is a piquant situation. They have to please both their shareholder and the regulator. The shareholder is no ordinary entity. While it owns majority shares in these banks, it also manages to have nominees on the board of the regulator. The individuals nominated on the board of RBI also act as representatives of the government as the majority shareholder of public sector banks. Many of these banks may be listed on the stock exchange, but the peculiar nature of the triangular relationship does raise uncomfortable questions about governance and regulatory oversight.
Similar problems have arisen in the insurance sector. The finance ministry is keen to meet its fiscal deficit target by speeding up the disinvestment process. Having failed to make much headway in the first 10 months of the year, it can now simply direct the country’s largest life insurance company, Life Insurance Corporation, to use its cash reserves to buy the government’s shares in a clutch of public sector undertakings.
The irony is that the finance ministry, the greatest proponent of reforms, has failed to carry out basic reforms in the way it deals with financial intermediaries like banks and state-owned insurance companies. In an ideal world, it cannot be allowed to meet the government’s fiscal policy targets by using its clout as a shareholder of these institutions.
This should change. To start with, therefore, it is perhaps time the finance ministry hived off its entire financial services division into a separate ministry, which could independently act as a shareholder of banks and financial institutions. That way banks and insurance companies could take business calls independently. In the process, the government can also prevent the piquant situation of the finance ministry nominee on the RBI board also acting as a representative of the banks’ majority shareholder.