If there was a good reason for the financial regulators to meet each other and do hard business it is now. They have a forum for that. The Financial Stability and Development Council (FSDC), the apex body of the regulators set up as a compromise for an integrated financial services authority. The FSDC has also stuck to its time table to meet twice every year. Yet as the records of the past couple of meetings of FSDC evinced through their press releases show they have refrained from discussing or taking position on issues on each others’ turf. And that pussy footing has costs for the economy as the current banking crisis shows. The costs, beyond the obvious, are larger still. India has begun to harbour ambitions to become an intermediate financial centre through GIFT city. This includes making the country the hub of a regional insurance market. The fallout of the Nirav Modi affair, of regulators squabbling publicly, is hardly a demonstration of confidence in setting up a cross border financial centre.
After the $2 billion case of fake letter of understanding (LoUs) burst out at the Punjab National Bank in January this year, the Finance Ministry has blamed the Reserve Bank of India. The Governor of RBI has returned the compliment, in equal measure. But except for making media headlines, these have not resulted in any long-term measures, which would improve the working of credit mechanism at the banks. There has been more, meanwhile. The Securities Appellate Tribunal has accused a member, no less, of the Insurance Regulatory and Development Authority of “aiding and abetting corruption”, a position that makes it difficult for the regulator to command any respect among the insurance companies. The only reason the banking crisis has not reverberated in Parliament is simply because the legislature has hardly met in this season to do any semblance of work. So if there is any hope in hell that some agency would restore order in the worst crisis to have come upon the financial sector, it has to be the FSDC.
The FSDC, set up in December 2010, can potentially take up these challenges. For that it has to attach significance to one of the terms of its creation. It was to sort through wrangling among the financial sector regulators by means of “inter-regulatory coordination”. This is one area however, where the body has gingerly step danced clear off like a gentleman’s club. Yet, as of now, there is no better institutional mechanism available with any of the regulators to deal with the current crisis.
In the meeting in December, the FSDC discussed what should be offered by the government in the budget, to the financial sector. In the previous meeting in August 2017, the members soaked in the “extraordinary financial market confidence, reflected in high and rising bond and especially stock valuations”. Since non-performing assets (NPAs) are supposed to be the domain of only one regulator, the RBI, there is never any position taken within it by the FSDC on the risks they can pose to the economy; mis-selling of insurance has not figured in the FSDC deliberations, too. If these have figured, the terse press releases have never demonstrated any of those concerns for the public to feel assuaged.
In meetings with some of those present at these sessions, this writer has come away with the impression that hard negotiations are avoided. The members comfort themselves with the account given out by the respective regulators. Essentially, it remains a talk shop that refrains from telling anyone present what to do. Since it avoids causing discomfort, the usefulness of the forum despite its huge potential has sharply dipped. Here lies the problem.
There is of course an additional level of problem at the current stage. The FSDC meetings are chaired by the Finance Minister. It was envisaged that if the regulators fought among themselves the Finance Minister would refrain from taking sides and instead would step in as the chair to push for an amicable solutions. Remember the entire architecture was a bow to the personality of the then finance minister Pranab Mukherjee. It unravelled as soon as he left the North Block and has never managed to get back on the rails again. Under his successor P Chidambaram it saw some fierce clashes with apparently a walkout by one of the finance ministry officials from one of the meetings. Since Arun Jaitley has made himself a party to the banking crisis, it is difficult to envisage how he can play the role of a law giver at this stage in the forum.
If this is the present state of FSDC, what are the chances that going forward it can turn itself around. The great advantage of this body is that its discussions are held in camera. This gives it a level of comfort that no other body provides. Second, the people at this table combine the leadership, the domain knowledge and the sense of responsibility that no other such forum provides. In fact there are none. The collective needs to develop an opinion at this stage unlike the public sector culture of causing no offence. Only then would we have seized the opportunity from the Nirav Modi affair as a culmination of the NPA crisis.
FSDC provides the best option to contain the fall out and make possible for each to consider ceding some grounds to each other to build a more cohesive financial sector regulatory architecture that India sorely needs.
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