Reserve Bank disputes IMF view, says regulators act independently

Jan 17 2013, 02:02 IST
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SummaryThe Reserve Bank of India has rejected the observations of the International Monetary Fund that Indian regulators lack de jure independence

The Reserve Bank of India has rejected the observations of the International Monetary Fund that Indian regulators lack de jure independence. Instead, the RBI contended financial sector regulators in India operate independently within statutory frameworks and the de facto position reveals no interference in the functioning of regulators.

The RBI, in its response to the joint study by IMF and World Bank on the Financial Sector Stability Assessment for India, said that India cant follow international group exposure norms as it would hamper economic growth. Keeping the group borrower limit at the level of the single borrower limit would severely constrain the availability of bank finance, which would hamper the growth of the economy, the RBI said.

The IMF report that was released on Tuesday had said the RBIs regime for large exposures and connected lending should be tightened in line with international practice.

At present, the large exposure limit is a maximum of 55 per cent of a banking groups capital. It had identified areas for improvement including greater de jure independence of regulatory agencies, consolidated supervision of financial conglomerates, reductions in the large exposures and related-party lending limits in banks.

The IMFs report comes at a time when the apex bank is in the midst of issuing new bank permits and has also got enhanced supervisory powers with the passage of the Banking Laws (Amendment) Bill, 2011. It is part of the review of 25 systemically important economies under the Financial Stability Assessment Programme (FSAP).

While acknowledging the moral hazard posed by the appointment of an RBI officer as a nominee director on the banks board, RBI said, This system has served India well and ensured more effective compliance with RBI regulations from the banks side. Nevertheless, RBI is sensitive to the issue and has taken up the matter with government of India for amendment of the enabling legal provisions.

Meanwhile, referring to the insurance regulator, RBI said the IRDA has started addressing issues for sharing of information at the international level through entering into a Multilateral Memorandum of Understanding under the International Association of Insurance Supervisors

Allaying concerns over capital market regulations, the RBI said Sebi has been taken a number of measures to re-energise the mutual fund industry to increase product penetration especially in smaller cities/towns.

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