RBI’s multiple roles create conflict: IMF
As per International Monetary Fund (IMF) report, India, despite its recent successes in developing a stable financial system, its financial sector still faces up obstacles to its ability to support growth and stability.
As per report, which is part of IMF’s Financial Stability Assessment Programme (FSAP):
Extensive role of government in the financial sector- through ownership of large financial institutions, captive government financing, directed credit to priority sectors, strict controls over the range of permissible activities, and limits on the accessibility of foreign capital — contributes to a pile-up of fiscal contingent liabilities and creates a risk of capital misallocation that may hinder economic growth.
- Indian financial system remained predominately stable owing to its sound regulatory and supervisory regime. However, there are some voids, including some limits on the de jure independence of the regulators (RBI and IRDA).
- Banks have sufficient buffers in the form of high quality assets (cash and holdings of government paper) to respond any eventuality of reversal of capital flow or liquidity pressure owing to ongoing upheaval in international markets.
- Multiple roles of RBI such as monetary authority, bank regulator, and government debt manager may have led it to require banks to hold larger holdings of government debt than might be needed on prudential grounds.
- Board members of public sector banks must be independent and not from the RBI as nomination of RBI officers as board members of banks may be conflicting to the supervisory role of the central bank.
- Use of the banking system rather than government programmes in meeting the needs of priority sectors — agriculture, small and micro credit, education, health — and underserved areas may conflict with RBI’s supervisory role.
- RBI should be given greater powers to conduct carve-outs and the central bank should give more attention to crisis readiness.
- Strengthening of resolution powers and contingency planning for insurance companies and the payment system.