Making sense of financial laws

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The Financial Sector Legislative Reforms Commission should seek to ensure that foreign, private and public sector banks come under a single legislative framework. The RBI Act should be divested of its colonial baggage.

The setting up of the Financial Sector Legislative Reforms Commission (FSLRC) is a major landmark. Over the years there have been piecemeal changes to address specific issues; in the event the financial legislative framework does not provide for a cohesive whole and there are areas of jurisdictional overlap.

The Commission consists of seven part-time members and three full-time members, but all the members would have to devote a great amount of time to this important exercise. The task of the Commission to review 60 Acts is mind-boggling and the two-year term is, if anything, for too short for this vast task.

The FSLRC would be expected to act as an oversight body for the implementation of the new regulations and take into account the need for changes over time.

A notable feature is that the membership of the FSLRC has not been restricted to the public sector, but also includes those from the private sector. It is expected to be a genuine collaborative effort of minds from different walks of life. Each member has a strong credibility and the Commission, when it starts functioning, will hit the ground running.



CHANGED CONTEXT

5.There have been, from time to time, a proliferation of amendments and rules, which themselves create risks, and result in regulatory gaps in the oversight mechanism.

There are many ways in which the new legislative framework can be worked out. One approach could be to first examine the older legislation, such as the Reserve Bank of India Act, 1934, as amended, and the Banking Regulation Act, 1949, as amended.

The RBI Act was drafted in the context of strong and open animosity between the colonial government in Delhi and the RBI based in Mumbai which was suspected as being too close to the “nationalist interest”. The present RBI Act contains provisions that go back to the animosities of the 1930s. How else does one explain the clauses in the RBI Act that provide legal powers to the government to commit excesses against the RBI top management?

While the colonial government viewed the RBI with great suspicion, hitherto unreleased documents when put in the public domain would provide an effective background to why the government was vested with powers 75 years ago to dismiss the Governor and Deputy Governors without assigning any reason.

While this may have had some context in 1934, it is unconscionable that these repugnant clauses should remain, despite several amendments.

It is pertinent to note that civil servants have the safeguard of appealing to the Central Administrative Tribunal (CAT), but even today the RBI top management has no such recourse to appeal.

INEFFECTIVE PENALTIES

The cash reserve ratio (CRR) was a powerful instrument of policy with very strong deterrent penalties. The well-intended amendment in the law that no interest can be paid on CRR balances has greatly attenuated this instrument.

With the Bank Rate being consciously kept low and unchanged over the years, the imposition of a penalty based on the low Bank Rate stultifies the whole process of monetary discipline. It is to the credit of the RBI that it has been able to use strong moral suasion while its most potent weapon has been blunted.

In many ways, the RBI has onerous duties without the necessary powers. Both, the RBI Act and the Bank Regulation Act do not provide for meaningful penalties, while in contrast the SEBI Act does provide for “punishment befitting the crime”.

ALLOWING FOR AUTONOMY

The problems are magnified by the fact that three-fourths of the banking system is in the public sector with majority control in the hands of the government. The Commission would need to delineate proprietory interests from regulatory powers. The absence of delineation of powers has greatly attenuated the system and the financial system becomes a hostage of the political process.

Although an enlightened government has respected the Fiscal Responsibility and Budget Management Act, there is a lacuna in the RBI Act in that there is no cross-reference to the two Acts.

The constitution of the RBI Board should be left largely to the Board rather than it being a source for political patronage. Again, there should be a regular periodic rotation of one-third of the Board. There is merit in having a separate dedicated Financial Sector Supervisory Board. The present legislation only allows the membership to be drawn from the RBI Board.

The legislative framework for banking is indeed stultifying. There are different clauses governing private, foreign and public sector banks. What is even more glaring is that even within the public sector banks, there is a proliferation of legislation. There should be a single legislative framework.

That said, the Commission has miles to go.

(The author is an economist. [email protected])

Published on March 11, 2011
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