Raghuram Rajan, RBI governor
Mumbai, June 17: Reserve Bank of India governor Raghuram Rajan today slammed the move to foist a system of judicial oversight over financial services regulators – a recommendation that was made last year by the Financial Services Legislative Reforms Commission (FSLRC) headed by retired Justice B.N. Srikrishna.
In an uncharacteristic, hard-hitting criticism of the FSLRC report, Rajan termed the committee’s suggestions as “schizophrenic”, “faddish” and “impressionistic” that had been made without any deep analysis on the specious ground that this would introduce a system of checks and balances.
“Too much of checks and balances could completely vitiate the flexibility afforded by rewriting laws. We need to find a balance….I worry we have not thought this through fully,” Rajan said while addressing a banking and economic conclave here organised by the State Bank of India.
The FSLRC had set the cat among the pigeons when it proposed the creation of a unified Financial Sector Appellate Tribunal (FSAT) that would hear all appeals in finance and that included the RBI for its regulatory functions.
He also rubbished the FSLRC suggestion of creating a Unified Financial Regulatory Agency that would take over the work from the RBI in the areas relating to the Bond- Currency- Derivatives nexus.
While Rajan was withering in his criticism of the FSLRC’s suggestions to undermine the independence of the financial regulators, he said the monetary policy framework would be guided by RBI deputy governor Urjit Patel’s report in January this year.
The Urjit Patel report and the FSLRC suggestions have been at odds over the conduct of monetary policy. While both reports said that a monetary policy committee ought to be set up, they differed sharply on the composition of such a committee.
Urjit Patel had asserted that the RBI governor ought to have full say on the composition of the committee while the FSLRC had suggested that the government would independently appoint three of the five external members on the monetary policy committee while consulting with the RBI chairman on other two members, which would significantly undermine the RBI’s independence in the conduct of monetary policy.
In an apparent message to the new government that it should think twice before looking to implement some of the recommendations made by the FSLRC, the RBI governor tried to drive home the point that the country’s regulators were working fine and there was no need for a drastic overhaul as suggested by the FSLRC.
“`Let us recognise the value of crossing the river by feeling each stone before we put our weight on it. Let us not take a blind jump hoping that a stone will be there to support us when we land. Or in American, if it ain’t broke, don’t fix it!”, he told the gathering.
These were not the only words from an aggressive Rajan who reminded many of the former RBI governor Duvvuri Subbarao who often protected the central bank’s turf.
Dwelling on the FSLRC suggestion to set up an FSAT that could scrutinise decisions of the regulator, Rajan said many actions taken by regulators like the RBI stemmed from its sound judgement based on years of experience.
He added that one of the dangers of excessive legal oversight will be to ask tribunals to make judgments that they simply do not have the capability, experience, or information to make, and where precise evidence may be lacking.
“Courts do not interfere in the specific decisions of a corporate board…in the same way, there are a range of regulatory decisions where regulatory judgment should not be second guessed,” the RBI governor added.
Rajan said there already were checks and balances in place governing regulators. For instance, senior officers of the regulator are appointed, and can be removed, by the government.
Here, he welcomed the FSLRC recommendation that talked about presenting an annual report to Parliament, as well as regular discussions with parliamentarians.
However, the RBI governor expressed grave concerns over the proposed tribunal questioning regulators over policy matters.
“So long as the tribunal only questions administrative decisions such as the size and proportionality of penalties, I do not see a problem. But if it goes beyond, and starts entertaining questions about policy, the functioning of a regulator like the RBI, which has to constantly make judgements intended to minimise systemic risk, will be greatly impaired,” he observed.
“My personal view is that moving the regulation of bond trading at this time would severely hamper the development of the government bond market, including the process of making bonds more liquid across the spectrum, a process which the RBI is engaged in,” he said in an indication that shifting the regulation of bond trading from the central bank would have an adverse impact on the government bond market.
Rajan said the FSLRC also seemed to be inconsistent in its emphasis on synergies and regulatory uniformity.
“It proposes all regulation of trading should move under one roof, all regulation of consumer protection should move under another roof, but the regulation of credit should be balkanised – banks should continue to be regulated by the RBI but the regulation of the quasi-bank NBFCs should move to the Unified Financial Agency, a regulatory behemoth that would combine supervision of trading as well as credit," he said.
This balkanisation would hamper regulatory uniformity, supervision of credit growth and the conduct of monetary policy, he added.