Rijo Jacob Abraham
Terming the recent spat between IRDA and SEBI over the ULIP issue as “unfortunate”, former RBI governor Bimal Jalan said it is best not to tinker with the autonomy of RBI and splitting the central bank into two separate bodies “won’t work”.
“RBI has a good track-record of handling the financial and monetary matters. Why should we alter a system that has served us well?” he told Zeebiz.com on the sidelines of a book release function in New Delhi recently.
SEBI and IRDA had differences over the jurisdiction of United Linked Insurance Plans (ULIPs), which are part insurance and part investment products. It was neither resolved between the regulators, nor by the High Level Coordination Committee (HLCC), headed by the RBI.
Since the Supreme Court also failed to resolve the issue, the government had to issue an Ordinance in IRDA’s favour. During the monsoon session of Parliament, the Ordinance was passed as a Bill.
The Securities and Insurance Laws (Amendment) and Validation Bill, 2010, amended the Reserve Bank of India Act and set up a joint statutory body headed by the Finance Minister, undermining the central bank’s role as the apex financial regulator.
The bill calls for setting up of Financial Stability and Development Council (FSDC) which will comprise heads of various regulators like IRDA, SEBI, pension fund regulator PFDRA and RBI.
But RBI has continued to reiterate its stance against the setting up of the body, despite government attempts to ally its fears by appointing RBI governor as its vice-chairman. It argued that setting up of the body will increase government intervention in the banking sector.
“The jurisdiction issue, though not a common phenomenon, has happened earlier also. It is unfortunate that they (IRDA and SEBI) didn’t reach any amicable conclusion by themselves. But to alter autonomous structure of RBI is unwelcome”, Jalan said.
Asked whether splitting the apex bank into separate financial (or banking) and monetary bodies was an option in this context, he said it is “impossible to split RBI and (that) it won’t work”.
The idea of splitting RBI to insulate its monetary autonomy has come to the forefront recently.
Behind the idea of splitting RBI is the question of why the central bank should not come under the purview of an inter-regulatory body like the HLCC when it is also a banking sector regulator.
Saying that the global economic crisis has changed the face of banking system, Jalan cited the example of Financial Services Authority (FSA), a super-regulator body of the UK, which was abolished.
George Osborne, the Finance Minister of the UK abolished FSA in June for being too narrow in its focus. It has since then come under the Bank of England, restoring the latter’s power as a banking-sector regulator.
The FSA was established by Gordon Brown in 1997 as the Chancellor of the Exchequer. Mr Brown is widely alleged for going soft on banks, which led to their failure.
Bimal Janal declined to comment on the question whether a further hike in repo or reverse repo-rate will be too aggressive.
Asked whether altering the CRR would be more prudent, considering the fact that the system is facing a liquidity deficit since May, he said, “These are but various options before the Governor and I cannot comment on the actions of the institution, as I had held the post earlier.”