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Both banks and the non-banking finance companies (NBFCs) should come under the regulatory purview of the Reserve Bank of India (RBI) for financial stability, says central bank chief D Subbarao, a view not supported by the Financial Sector Legislative Reforms Commission (FSLRC).
The FSLRC, a body set up by the government to rewrite the legal-institutional architecture of the Indian financial sector, recommends that RBI should eventually (within 5-10 years) focus on monetary policy and traditional central banking activity only, and shed all other regulatory and supervisory functions.
However, the RBI governor highlighted the reasons on why the central bank should regulate both banks and NBFCs. "One of the major causes of the 2008 financial crisis was that credit intermediation activities were conducted by non-banks (the so called shadow banks) which were primarily outside the regulatory purview," said Subbarao.
According to him, this raised serious concerns of regulatory arbitrage, requirements for regulation of entities performing similar activities and issues of commonality of risks and synergies of unified regulation for such entities.
Subbarao also believes there are strong inter-linkages between banks and NBFCs. Unified regulation by the same regulator is essential for financial stability, he adds. "For monetary policy to be effective, credit creation (by banks and credit institutions like NBFCs) should be regulated by the central bank."
According to the RBI chief, after the financial crisis, the trend has been to entrust more, not less, regulation to central banks. The discussion paper on appropriate banking structure in India is in the final stages of preparations and it will be issued shortly, he adds.
