Former Reserve Bank of India (RBI) governor
YV Reddy on Friday defended the government's stand on non-banking financial company (NBFC) crisis, says liquidity problem faced by Infrastructure Leasing & Financial Services (IL&FS) is the responsibility of the central bank and it must be concerned at the risk assessment capabilities of public sector giants like LIC and SBI. Here are the key highlights of Former Reserve Bank of India (RBI) governor YV Reddy's speech
Use of reserves accumulated in the past will have to consider three factors, namely, a) the macroeconomic implications of such transfers, in particular, the monetary implications which are likely to be expansive; b) the issues of inter generational equity since the reserves have been accumulated as an Insurance for the future; c) the constitutional propriety of using the reserves directly to fund capital of the banks instead of crediting it to Consolidated Fund of India and then using it as considered necessary by the Government, and d) the incongruity of the banking regulator being asked to use its resources to fund banks that are in need of the capital. A Committee has been appointed to advise the RBI on the capital framework and related matters.
Prompt Corrective Action
Secondly, the Government demands that RBI should relax the norms of Prompt Corrective Action. The Government's contention is that the growth is affected by such stringent measures. This is certainly an operational matter and a matter on which the Government owned institutions could make representations to the RBI for consideration. There can be genuine concerns of Government, but governments generally persuade the regulator but not direct it in such matters. Obviously, the Government is tilting in favour of their own regulated entities who failed to convince the regulator in the matter, though RBI is the agent of government fully equipped to take a view on the matter. In a manner, this dilutes both the autonomy and accountability of RBI.
Basel 3 Norms
Thirdly, the Government is also seeking the dilution of the Basel III norms for India on the ground that these are more stringent than the global standards. In general, the Basel III norms assume a particular level of realisable value of the assets in case it becomes non-performing. In India, the transactions cost and the liquidity in relevant markets, in particular in real estates, make the realisable value generally far less than the declared value. There is, thus, a case for the Indian norms to be more stringent than global ones. But the scope, coverage and deviation from global standards are a regulatory and operational matter.
Liquidity To NBFCs
Fourthly, the extent of RBI response to the liquidity conditions being faced by the non-banking financial companies is another point of friction between the Government and the RBI. If ILFS faced a liquidity problem it would have been the responsibility of RBI. Obviously it is an insolvency issue since the Government intervened. Perhaps, Government intervened since both LIC and SBI owned by it are large stake holders in ILFS, and also because many infrastructure projects are involved. In any case, RBI should be concerned at the risk assessment capabilities of public sector giants like LIC and SBI that allowed this to happen while having large stake in ILFS.
Fifthly, the government seeks a policy and a procedure from RBI to facilitate lending liberally primarily to small and medium industries. The SMEs problem is not new, nor is it unique to India. However, any extra-ordinary push will jeopardise depositors' interest or induce systemic instability. This is a matter again in which Government and the industry could raise the issues and convince the RBI, but should ideally respect the final judgement of RBI. To implement any support beyond what RBI considers it to be prudent, Government should ideally draw upon its budgetary resources as is being done in case of waiver of farmers loans.
Board Vs RBI
Finally, the issue of governance and the role of Board have been raised. This certainly is a matter which requires to be considered keeping in view both the global practices and changing domestic circumstances. In any case, if the role of the Board is being reviewed, it should encompass the composition of the Board and relations between the Board and Government as well as Governor. The current composition of the Board in India is unique and is appropriate to a full service central bank. Currently, the Board focuses on house-keeping and renders advice and guidance on policy, and is active in Committees of the Board. Committees of the Board are constituted on advice of the Governor and they provide fora for detailed scrutiny and guidance by the Board Members.
The issues relating to capital framework, the regulatory relaxations and the role and composition of Board, will have a lasting impact on RBI.