RBI governor D. Subbarao (right) with K.R. Kamath, chairman of the Indian Banks’ Association, in Mumbai on Tuesday. (PTI)
Mumbai, Aug. 13: Reserve Bank of India (RBI) governor Duvvuri Subbarao has expressed dismay over the recent moves to circumscribe the regulatory powers of the country’s central bank.
Subbarao, who retires next month, has once again articulated his concern over the move to take non-banking finance companies out of the regulatory supervision of the RBI and place it within the ambit of the yet-to-be created Unified Financial Authority, which is the brainchild of the Financial Sector Legislative Reforms Commission (FSLRC) headed by former Supreme Court judge B.N. Srikrishna.
The Srikrishna report, which was submitted in March, had said the RBI should only focus on monetary policy and traditional central banking activity and give up all other regulatory and supervisory functions.
In the interim, the report suggested, the RBI should be the regulator for banking and payment systems. The UFA will become the regulator for all financial services other than banking and payment systems.
Addressing the two-day annual banking summit organised by the Federation of Indian Chambers of Commerce and Industry (Ficci) and Indian Banks’ Association (IBA) here today, Subbarao said if India accepted this recommendation, it would be bucking a global trend since the economic crisis erupted in 2008 when most governments entrusted “more, not less, regulation to central banks”.
Subbarao added that such a move would go against the financial stability and dilute the impact of monetary policy. Stating that there are strong inter-linkages between banks, NBFCs and other deposit-taking entities, he said for monetary policy to be effective and financial markets to remain stable, these entities should be regulated by the central bank.
“A unified regulation by the same regulator (RBI) is essential for financial stability as there are strong inter-linkages between banks and deposit-taking non-banking financial companies. (Moreover), for monetary policy to be effective, credit creation by banks and credit institutions such as NBFCs should be regulated by the central bank,” he said.
The outgoing RBI governor added that one of the major causes for the 2008 financial crisis was that credit intermediation activities were conducted by non-banks, or the so-called shadow banks, which were primarily outside the regulatory purview.
Subbarao also threw up a host of issues that bankers ought to debate at the summit. These included the holding company structure in Indian banking; the pros and cons of creating big banks through mergers and amalgamations and the resultant moral hazard of creating “too big to fail” banks; the thrust for subsidiarisation of foreign banks; and India’s preparedness to create exclusive investment banks.
On mergers, Subbarao said there was a need to have four to five banks of “comparable size” at all times to ensure that lenders do not acquire monopolistic market power, adopt predatory behaviour and force smaller banks into unviable models.
He said there was a definite skew in the Indian banking system where the country’s second largest bank was almost one-third the size of the biggest bank (the State Bank of India).
The RBI governor further revealed that it was looking to address some of the pending issues with regard to conversion of foreign bank branches into their wholly owned subsidiaries. Most of these were legal in nature and pertained to the transfer of rights and liabilities.
One of the key developments post the sub-prime crisis was that leading investment banks such as Morgan Stanley and Goldman Sachs had converted themselves into bank holding companies as the US investment banking sector collapsed because of high leverage.
In India, the term investment bank (entities into asset management, capital raising, merchant banking etc) is not legally defined and no entities are registered with the market regulator.
Another issue that needs examination is whether investment banking should come under the proposed Non-Operative Financial Holding Company (NOFHC), which has been proposed for new banks, he added.