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RBI disagrees with IMF, says regulators function independently

The IMF report said that the Indian economy faces near-term risks of worsening bank asset quality and pressures on systemic liquidity.

Mumbai: Disagreeing with IMF's assessment of India's financial sector, the Reserve Bank Wednesday said the government does not interfere with the working of regulators and the country's banks cannot follow international group exposure norms as it would hamper economic growth.

The financial sector regulators do not enjoy de jure status in India but their "de facto position too reveals no interference in the functioning of regulators" by the government, Reserve Bank said in its comments on the IMF's Financial Stability Report on India.

The IMF report said that the financial sector regulators in India "lack of de jure independence, which can be rendered more challenging by the intricate relationship with state- owned supervised entities and their business decisions".

RBI, however, added that IMF's suggestion "merits consideration" as the regulators have to function within the framework of policies framed by the government.

The apex bank said that the government had set up a Financial Sector Legislative Reforms Commission (FSLRC) to suggest steps to streamline and further strengthen the statutory framework comprising an array of statutes enacted since 1930s. The FSLRC is expected to give its report by March 2013.

Moreover, the RBI said steps were underway to accord a statutory basis to the pensions regulator.

With regard to IMF's observation on large exposure limits, RBI said it was not possible to follow the international norms with regard to group borrower limit as it would hamper the growth of economy.

The IMF report said that the Indian economy faces near-term risks of worsening bank asset quality and pressures on systemic liquidity.

Referring to moral hazard issues following appointment of nominees on bank boards by RBI, RBI said: "the 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", it said.

The IMF's report is part of the review of 25 systemically important economies under the Financial Stability Assessment Programme (FSAP).

Besides other issues, the IMF report had identified gaps in international and domestic supervisory information sharing and co-operation, consolidated supervision of financial conglomerates, and some limits on the 'de jure' independence of the regulators like RBI and IRDA.

With regard to overseas supervision of banks, RBI said, it has already entered into information-sharing MoUs with 12 jurisdictions and two more are in the pipeline.

The IRDA, it added, was also addressing issues relating to sharing of information at the international level through entering into a Multilateral Memorandum of Understanding (MMoU) under the aegis of the International Association of Insurance Supervisors (IAIS).

On the issue of Statutory Liquidity Ratio (SLR) hampering monetary policy transmission, the RBI said the ratio, which is the percentage of deposits banks park in government bonds, has been brought down over the years.

"The holding of government bonds could help banks to better cope with financial stress situations by giving greater access to liquidity," RBI said, adding steps are underway to enhance liquidity in government securities market.

Referring to concerns raised on stock market regulations, RBI said regulator SEBI has been taking several steps to re-energise the mutual fund industry to increase product penetration especially in smaller cities/towns.

On issues of auditing and accounting practices in the securities market, RBI said the Companies Act and Chartered Accountants Act provide a framework to maintain objectivity and integrity of accounting and audit.

Under the recently constituted inter-regulatory framework, SEBI has set up an Early Warning Group (EWG) for financial markets to address potential crisis scenarios.