The Hindu Business Line : Tilting at fund transfers

THE RESERVE BANK OF INDIA, in true Don Quixote style, has decided to track live, fund transfers across the financial system to trap those playing with public funds. In mimicking Western regulatory models, the RBI believes that some Systemically Important Financial Intermediaries (SIFIs) have become financial conglormerates and need monitoring. The first intimation of this came in the November 3, 2003 Credit Policy, when the RBI Governor, Dr Y. V. Reddy, talked about a special monitoring system for SIFIs after consulting the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority.

The RBI Report on Monitoring of Financial Conglomerates thinks segmental regulation by the RBI, SEBI, the IRDA and the proposed new pension authority may not help the cause as financial linkages do throw up "concerns about regulatory arbitrage, non-arm's length dealings, etc., arising out of Intra-group Transactions and Exposures (ITEs) — both financial and non-financial." Also, the belief that a top financial conglomerate will not fail and can hold out against any damage to any of its operational arms can only breed a false feeling of well-being, hurting the system eventually. In an interview to Business Line, Dr Reddy had said the new arrangement would look not only at balance-sheets but also at intra-group transactions, including off-balance-sheet items. Consolidated supervision is mandatory for groups in which banks are the controlling entities. Banks come under the purview of the Consolidated Financial Statements (CFS) intended for public disclosure, and the Consolidated Prudential Reports (CPR). Banks have to submit CPRs on their subsidiaries, say, in the insurance business. The RBI Report says the CPR is to sniff up the past while the new strategy will gather data on "emerging situations." Under the proposed framework, financial conglomerates will be identified and intra-group transactions and exposures (not captured now) marked for corrective action. The Report also insists on "all individual transactions above specified thresholds" between two entities being reported. The absolute threshold to begin with is Rs 1 crore for fund-based and Rs 10 crore for non-fund-based transactions.

The RBI Report could not have drawn up a better model but even bankers wonder over its efficacy given the near-absence of reporting and monitoring data. How genuine will be the data culled by the designated entity in a financial conglomerate? There is now no legal backing for inter-regulatory handholding or for prohibiting intra-group transactions and exposures. The investing public outside the RBI Towers will, anyway, not be privy to anything, as the strategy will not lead to additional public disclosures. Would it not be better for the regulators, rather than the RBI, to dig in and get a sure feel of the goings-on in their spheres? Can the regulators boast of intelligence clued to all deals happening in the market place? Two major scams and a blow-out in the urban co-operative banking sector have dented the credibility of regulators. When the RBI failed to track down Overseas Corporate Bodies, existing and fictional, it just banned the OCBs without helping anyone. For the present, it may be best for the regulators to adopt a minimal brief as money flows, rarely, if ever leave trails.

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