Do regulators need judicial oversight? Raghuram Rajan doesn’t think so

Raghuram Rajan said that too much of checks and balances could completely vitiate the flexibility afforded by rewriting laws. Photo: Abhijit Bhatlekar/Mint

 Dinesh Unnikrishnan |  Anup Roy  Live Mint 17 June 2014

Rajan also questions FSLRC proposals on determining appropriate size and scope of regulators

Mumbai: Reserve Bank of India (RBI) governor, Raghuram Rajan, has questioned the need for judicial oversight of regulatory actions as suggested in the Financial Sector Legislative Reforms Commission (FSLRC) report, saying that “too much of checks and balances could completely vitiate the flexibility afforded by rewriting laws.”

Speaking at a banking conclave organized by the State Bank of India in Mumbai, Rajan said that there are two areas within the FSLRC report that needed to be debated—the oversight of regulators and the appropriate size and scope of regulators as laid down in the report.

Elaborating on the perils of excessive oversight, Rajan said that not everything a regulator does can be proven in a court of law.

“....a lot of regulatory action stems from the regulator exercising sound judgement based on years of experience. In doing so, it fills in the gaps in laws, contracts, and even regulations. Not everything the regulator does can be proven in a court of law,” said Rajan, adding that there are a range of regulatory decisions where regulatory judgment should not be second guessed.

On the proposal to create a Financial Sector Appellate Tribunal, Rajan said this could possibly undermine the abilities of regulators.

“The intent is to place more checks and balances on regulatory actions,” Rajan said.

Noting that even now, some regulatory decisions can be appealed to the central government, Rajan, however, questioned the need for such “checking and balancing”, saying legal oversight cannot become excessive.

Listing the dangers of excess legal oversight, Rajan said this would entail asking tribunals to make judgement in issues, where they do not have the capability and experience.

“If we attempt to do this, we will undermine the very purpose of a regulator,” Rajan said.

Rajan further questioned the recommendations of FSLRC with regards to the appropriate size and scope of regulators. “The FSLRC’s recommendations seem somewhat schizophrenic here,” said Rajan. He added that on the one hand FSLRC speaks of synergies in bringing together some regulators into one entity, but it also suggests breaking up other regulators “with attendant loss of synergies.”

The FSLRC report, submitted in March 2013 suggested far-reaching changes in the financial sector, including a single law that would subsume most of the existing regulations.

Rajan also said that since regulators like Securities and Exchange Board of India and RBI are already under regulations of courts and tribunals, any further tightening of legal oversight on regulators could lead to issues.

“It is better to revisit these issues a few years from now when both regulation and oversight mechanisms are better developed,” Rajan said.

He added that there are however, certain powers that RBI can give up such as management of government debt.

“If the government wants to manage its own debt, there is no reason for RBI to stand in the way. I don’t believe the government suffers any less from conflicts of interest in debt management (unlike the views of the FSLRC), but RBI could well carry out the government’s instructions without any loss in welfare,” the RBI governor said. He did add that the government could possibly depend on deputations from RBI for a while for advice.

“Regulatory freedom, flexibility is required. You shouldn’t give in one hand and take away everything from both hands. If we go much faster from where we are now, we may intrude on regulatory flexibility,” said Rajan while answering questions on the sidelines of the event.

“Don’t be excessively ambitious in moving from zero to hundred. Halfway houses are not terrible,” he said.

Separately, Rajan also cautioned against overreach of agencies such as the Central Vigilance Commission and the Central Bureau of Investigation in questioning business decisions taken by banks.

“We should be careful about excessive oversight here also. If bankers have to take risk, then there has to be acceptance that some loans will go bad. A business judgement may go wrong, sometimes we just don’t know enough. But to call it malafide, there should be evidence of money changing hands or some kind of gratification... Of course if there is evidence of malpractice then we should move swiftly,” he said.