Taking away the regulatory powers of the Reserve Bank of India to supervise non-banking finance companies and other deposit-taking entities may reduce the impact of monetary policy, RBI Governor D. Subbarao said on Tuesday.

“For monetary policy to be effective, credit creation (that is, by banks and credit institutions like NBFCs) should be regulated by the central bank,” said Subbarao, addressing a banking conference organised by industry body FICCI in Mumbai.

According to Subbarao, placing NBFCs under a Unified Financial Authority, as recommended by the Financial Sector Legislative Reforms Commission, will go against financial stability.

Explaining his stand, Subbarao said, “One of the major causes of the 2008 financial crisis was that credit intermediation activities were conducted by non-banks (the so-called shadow banks), which were primarily outside the regulatory purview. This raised serious concerns of regulatory arbitrage, requirements for similar regulation of entities performing similar activities, and issues of commonality of risks and synergies of unified regulation for such entities.”

He said there are strong inter-linkages between banks and NBFCs and a unified regulation by the same regulator is essential for financial stability.

Subbarao, whose term ends on September 4, said post-crisis, the (global) trend has been to entrust more, and not less regulation, to central banks.

Following the 2008 global credit crisis, the Government of India constituted the FSLRC “with a view to rewriting and cleaning up the financial sector laws and to bring them in tune with the current requirements”. The commission, chaired by justice B. N. Srikrishna, had submitted the report in March 2013.

> beena.parmar@thehindu.co.in

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