Role of FSDC

Economic Times, June 6, 2013:

FSDC must limit itself to coordination, Says RBI Governor D Subbarao

By ET Bureau | 6 Jun, 2013, 08.05AM IST
Subbarao rubbished the idea of a statutory role for the FSDC headed by the finance minister instead of its present role as a coordinator among regulators.

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MUMBAI: Reserve Bank of India GovernorDuvvuri Subbarao spoke straight from the shoulder against a bigger role for the government in financial stability and regulation when world over lawmakers are empowering regulators with more autonomy.

Rubbishing the idea of a statutory role for the Financial Stability and Development Council (FSDC) headed by the finance ministerinstead of its present role as a coordinator among regulators, Subbarao said this would achieve little.

"The recommendation that the executive responsibility for safeguarding systemic risk should vest with the FSDC board runs counter to the post-crisis trend around the world of giving the collegial bodies responsibility only for coordination and for making recommendations," Subbarao told a conference at the Indian Merchants Chamber. "We need to think through whether the responsibility of the FSDC board should be extended from being a coordination body to one having authority for executive decisions."

The UPA government has appeared to be wanting to acquire more power in the field of regulation, sometimes justifying its decision on the ground that it was stepping in to smoothen the rift between regulators. While an informal panel of regulators called FSDC was formed when Pranab Mukherjee was the finance minister, it is now being proposed to be made permanent with statutory powers.

The Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice BN Srikrishna has also recommended that decisions on interest rates should be taken by a monetary policy committee instead of being the sole prerogative of the RBI governor. "You need something that is drastic, something that is a total overhaul of the existing financial system," Srikrishna had said in his report.

Indian regulators such as RBI, Securities & Exchange Board of India and InsuranceRegulatory and Development Authority have been reasonably autonomous.

This despite occasional prodding by the government to tailor rules to suit its needs. But some believe that total implementation of the Srikrishna committee recommendations will erode the authority of the regulators and expose the markets to the whims and fancies of the ruler of the day.

"While FSDC is best suited for coordination, the responsibility for maintaining macroeconomic stability should largely be with RBI," said Vinod Kothari, a financial consultant and a visiting faculty at the Indian Institute of Management, Kolkata.

The governor had opposed the plan three years ago.

"We are all aware that both the prime minister and you have strong and impeccable commitment to regulatory autonomy," Subbarao wrote to Mukherjee in mid-2010 when the plan became public for the first time. "But we must evaluate the regulatory arrangement... in a long-term perspective when personalities change; the misuse of the ordinance is not beyond the realm of possibility for several reasons."

In the US and the UK, where light-touch regulation led to the 2008 global credit crisis, are bringing in tough legislation to avoid the repeat of such an event. These countries are empowering the central banks to regulate financial entities much beyond setting interest rates. Instead, in advanced countries, the remit of the central bank now extends to micro managing systemically important financial institutions. In India, not much has moved.

"The way forward from here in India is still uncertain," said Subbarao. "The agenda has been set more by immediate concerns, and there has been no explicit attempt to define what constitutes a 'financial stability' issue that falls within the domain of the FSDC."

Readers' opinions (8)

M G WARRIER (Mumbai)
1 Hour ago
To those who were following the relationship issues between Finance Ministry on the one side and all financial sector regulators on the other side, it was evident from the very beginning that setting up FSDC was the formalization of the continuing efforts by Finance Ministry to act as a super regulator over all regulatory bodies in the financial sector. Experts in the field had minced no words to point out that this will destabilize the equilibrium deftly built up by eminent persons who headed Finance Ministry and RBI in the formative years of financial regulation in India and consciously maintained by their successors till the recent past. Viewed in this context, the concern expressed by Dr Subbarao on June 5 at the 7th International Banking and Financial Conference 2013 should get the attention it deserves from all stakeholders.
Satish Marathe (Mumbai)
6 Hours ago
Silver: 2572

Power hungry politicians need to be kept under check. By speaking out against the FSDC, the RBI Guv may become unpopular but he has a duty to oppose what is not good for the country. Because, it is one more attempt to usurp power by the UPA by over riding the checks & balances provided in our Constitution.
Lakshmi Chatti (Bhubaneswar, India)
1 Follower
11 Hours ago

The RBI Governor is absolutely correct in. The FSDC, headed by the FM should limit its role to coordination and recommendations. The regulatory authorities like the RBI, the SEBI, and the IRDA are manned by specialists in the respective fields and are to be given the necessary autonomy .Provision of decision making powers to the FSDC may expose the economy to petty politicking which may prove to be fatal both for the Indian economy and democracy. The Executive should concentrate on creating a healthy atmosphere for proper functioning of various organs of the nation.
12 Hours ago
Gold: 17.1K

i agree with RBI GUV thatFSDC must limit itself to coordination because the proposed Financial Stability and Development Council (FSDC), seen by some as a super regulator in the offing, must limit itself to inter-regulatory coordination and its jurisdictions should be clearly definedFor ensuring financial stability,as we all know RBI is both well-positioned and performing this duty on its own. Indeed, it has an advantage in guarding financial stability because of its status as the monetary policy authority, the regulator of the banking system, the payments and settlements system and financial markets. Also, it is the lender of last resort to banks.Subbarao said the FSDC, chaired by the finance minister, has all regulators and secretaries and has been regularly meeting 3-4 times a year. Yet, the way forward is still not certain. â??The FSDC has not got so far to defining what is the financial stability issue.â?� There is a risk that FSDC will transgress into a domain that is beyond its jurisdiction if the issue is not defined clearly, he said.
Vinod (NCR)
13 Hours ago
Present set up has failed to control inflation, improve GDP and reduce Gold imports. If it is not working some changes must be devised.
Lalith (Bangalore) Replies To Vinod
12 Hours ago
that "some change" should not create more problems.
Kskasinathan (Chennai)
13 Hours ago
Platinum: 25.1K

The Central Government, specifically under congress led UPA is attempting to usurp the powers of many institutions and powers listed in State list under part XI of the Constitution due to expediancy on short term gains thereby undermining Federal structure of the Constitution.The attempts to accumulation of powers to Centre is fraught with dangers, which will be disproportionates to preceived gains in a given time, particularly when a elected Government is headed by a maverick with tendencies bordering autocratic style, it is a sure receipe for disaster to democratic principles.The Congress party consider that it alone has the right to rule the country and has tendencies of fascism, which got exposed during Mrs.Indira Gandhi's tenure as PM when emergency was declared, curtailing fundamental rights of the citizen, but short lived due to over throw of her regime through Ballot in 1977.The arrogance and self assigned right of ruling the country made democracy as a mockery and accountability as a mirage under it's Governance.The tendencies to rough shot and over ride strong opposition and criticism by Congress party landed the country in a serious situation both externally and internally.The party has to introspect what is ailing it and make a series of operations for survival as a political party with some relevance in future, failing which it will become a history
Adithyan (Chennai)
13 Hours ago
Silver: 2006
The stand of RBI governor is absolutely correct. He has come as RBI governor after a stint as finance secretary. He is now thorough with what ails the economy and how financial regulations are to be formed to bale it out. As for chidambaram, he is a politician who cares little for the consequences of his actions. In 2008, he had a plan for 68000 crores at the dictates of congress president who is an economic novice. He had no guts to tell back without indicating the resources in the budget no expenditure can be planned. But he bled the PSU banks for this promising to burse it in a matter of ten years. That is a perfect finacial jugglery.Wary of the inherent dangers in such financial acrobats, RBI governor is cautiously trekking the safe path. His recent orders prohibiting the nBFCs accepting deposit is perfectly correct since it protects the the public from the claws of dishonest NBFCs


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