Outgoing Reserve Bank of India Governor Duvuuri Subbarao on Tuesday cautioned against taking away regulatory oversight on NBFCs from RBI and placing them under a Unified Financial Authority, saying such a move will go against financial stability and whittle down 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, they should be regulated by the central bank.
"A unified regulation by the same regulator 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 like NBFCs should be regulated by the central bank," the outgoing RBI Governor told the FIBAC, the two-day annual banking summit organised by Federation of Indian Chambers of Commerce and Industry in Mumbai.
Explaining the reasons for his reservations against the move and why the RBI should regulate both banks, non-banking entities and all other deposit-taking bodies, Subbarao said, "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.
"This raised serious concerns of regulatory arbitrage, requirements for similar regulation of entities performing similar activities and issues of commonality of risks and synergies of unified regulation for such entities," Subbarao, who completes his five-year term on September 4,
He further said the country is going against the global trend wherein after the 2008 crisis, most of the leading governments have been entrusting more, and not less, regulatory powers to the central banks.
Following the 2008 global credit crisis, the government constituted the Financial Sector Legislative Reforms Commission "with a view to rewriting and cleaning up the financial sector laws and to bring them in tune with the current requirements", and the commission chairman retired justice BN Srikrishan had submitted report in March 2013.
The commission proposed shifting from rule-based to principle-based regulation of the financial markets as it felt that the principles will be enshrined in the law and the law need not change to reflect changes over time and in technology.
Some of the contentious FSLRC recommendations include -- taking away the powers of RBI and moving them to a Unified Financial Authority under which RBI will be regulating just banks and not NBFCs and others.
It also calls for setting up of a separate Financial Sector Appellate Tribunal and Resolution Corporation and Financial Redressal Agency to resolve inter-regulatory issues, besides an overarching Financial Sector Development Council.
The report also called for setting up a of Public Debt Management Agency to manage the government finances.
The FSLRC also recommended that RBI eventually (within 5-10 years) move onto focus on just monetary policy and traditional central banking activity, and shed all other regulatory and supervisory functions, and that the proposed Unified Financial Authority be the regulator for all financial services, including banking.