Rajan dismisses idea of unified regulator

Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday tagged as schizophrenic some of the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), which had proposed a unified regulatory framework by merging regulation of trading under a Unified Financial Agency. The commission was chaired by former Supreme Court judge B N Srikrishna.

“FSLRC’s recommendations (on the size and scope of regulators) seem somewhat schizophrenic,” Rajan said while delivering his speech at the State Bank of India Banking Conclave.

“On the one hand, it emphasises synergies in bringing together some regulators into one entity. But, in the process, it suggests breaking up other regulators, with attendant loss of synergies,” he said.

If FSLRC recommendations are implemented, bond-regulation activity of RBI, the Securities and Exchange Board of India and the Forward Markets Commission will be merged.

“There is no discussion of the empirical magnitude of the synergies gained or synergies lost. That makes the recommendations seem faddish and impressionistic, rather than based on deep analysis,” he said.

In this context, he made clear his reservations on the idea of shifting the debt management office from RBI as planned by the government.

“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 RBI is engaged in,” he said.

According to Rajan, FSLRC looks 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 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. This balkanisation will hamper regulatory uniformity, the supervision of credit growth, and the conduct of monetary policy,” he said.

The governor warned about the dangers of excessive legal oversight as proposed by the commission.

“Easing the appellate process will invite appeal. This will not be a problem in a developed country with well-established regulations, a case history of judgments and speedy delivery of justice. But in India, where the financial system is developing and many new regulations have to be framed, and where the tribunals will have a significant amount of learning to do, the encouragement to appeal could paralyse the system and create distortions, as needed regulations are held up and participants exploit loopholes.”

He cited the example of Sebi, which is already under the Securities Appellate Tribunal, and said so long as the tribunal only questioned administrative decisions such as the size and proportionality of penalties, it was not a problem. “But if it goes beyond, and starts entertaining questions about policy, the functioning of a regulator like RBI, which has to constantly make judgements intended to minimise systemic risk, will be greatly impaired,” he said. He summarised by saying the commission had not presented strong arguments for moving away from the present system. He cautioned that we should not be trying to solve a problem that does not exist. “As the Chinese would say, 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!”