Need to tweak the law to ensure RBI autonomy: IMF

BL :Mumbai, Sept. 2: 2013

 

Backing the central bank’s case for autonomy, the International Monetary Fund said it would be beneficial to remove certain provisions in the existing laws to ensure independence of the Reserve Bank of India.

In its financial sector assessment programme for the country, the Fund pointed out that the independence of the RBI is not enshrined in the law and there are some legal provisions that could seriously undermine its independence from the Government.

“Legal provisions in the Banking Regulation Law and the Reserve Bank of India Act allow the Central Government to give directions to the RBI, to require it to perform inspections, to overrule decisions and to supersede the RBI Board.

Although these provisions have never been used in practice, it would be beneficial to remove them from the law so as to provide greater legal certainty,” the Fund said.

Further, the IMF observed that as the statutes constituting public banks empower them to do banking business, there is no provision empowering the RBI to dis-empower such banks from carrying on banking business.

The RBI can also not remove officers/directors of a public bank, except directors appointed by shareholders other than the Central Government.

According to outgoing RBI Governor D. Subbarao, an autonomous and apolitical central bank is a delicate arrangement, and will work only if the Government respects the autonomy of the central bank, and the central bank itself stays within its mandate, delivers on that mandate and renders accountability for the outcomes of its policies and actions.

Several committees have suggested that the mandate of the RBI be narrowed on the argument that its currently broad mandate is diluting its focus on price stability — the core concern of monetary policy. The Financial Sector Legislative Reforms Commission, which submitted its report to the Government in March this year, has argued that the mandate of the RBI should be restricted to monetary policy and regulation of banks and the payment system.

Conflict of interest

According to the IMF, the authorities should consider providing greater clarity to the limitations of the nominee director’s role in order to avoid the appearance of the RBI becoming involved in a bank’s (public sector bank’s) internal control processes.

The Centre, on the recommendation of the RBI, nominates a person possessing necessary expertise and experience in regulation or supervision of commercial banks, as a director of a nationalised bank.

The provision does not mandate that such person should be an employee of the RBI. In practise, however, the nominee director is an employee of the RBI from a department other than bank supervision.

From the IMF assessors’ discussion with banks, it appears that this director takes an active role in the Board’s discussions and is sometimes implicitly relied upon to ensure regulatory compliance.

This blurs the lines between the supervisory role of the RBI and its assumed role as the Board’s compliance guardian.

ramkumar.k@thehindu.co.in

IMF’s assessment RBI independence not enshrined in the law Legal provisions allow the Centre to give directions to the RBI, to require it to perform inspections, overrule decisions and supersede the RBI Board No provision empowering the RBI to dis-empower public banks from carrying on banking business RBI cannot remove officers/directors of a public bank

(This article was published in the Business Line print edition dated September 3, 2013)