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Economists fear move to weaken RBI, cooperative sector

KOCHI: A draft report on financial sector reforms prepared by the Raghuram G. Rajan committee, appointed by the Planning Commission, has met with serious objections from economists and bank employees. Experts have criticised the move to establish a Financial Sector Oversight Agency (FSOA), Financial Development Council (FDC) and Financial Sector Appellate Tribunal, as proposed in the report. They have warned against any move to weaken the Reserve Bank of India and the cooperative banking sector.

The high-level committee was set up in August 2007, with Raghuram G. Rajan, Professor, Graduate School of Business, University of Chicago, as chairman. Among the other members of the 12-member body are K.V. Kamath, managing director of ICICI Bank; O.P. Bhatt, chairman, State Bank of India; Uday Kotak, CEO, Kotak Mahindra Bank; Chitra Ramakrishna, deputy managing director, NSE; and R. Ravimohan, managing director, CRISIL. The draft report has been submitted to the Planning Commission and the final report is awaited this month.

The panel is critical of Reserve Bank of India (RBI) and wants to sterilise it by superimposing a range of alternative bodies, says K.V. George, general secretary of the Bank Employees Federation of India – Kerala. The cautious exercise of authority by the RBI had guarded and insulated the Indian financial system from the market, derivative collapse in South East Asia and the U.S., he said.

He said the panel wanted release of the rural credit system to moneylenders at deregulated interest rates and dismantling of the cooperative banking system. The panel recommendations would facilitate legislation of financial gambling and speculation, he said. He criticised non-inclusion of representatives of trade unions in the banking sector in the panel.

The panel has mooted the sale of underperforming public sector banks, possibly to another bank or to a strategic investor. It proposes the creation of stronger boards for large public sector banks, with more power to outside shareholders. After starting the process of strengthening of the boards, delink the banks from additional government oversight, including the central Vigilance Commission and Parliament. The Committee believes that fewer constraints should be imposed on banks and more growth and competition should be encouraged.

An important proposal of the committee is to allow banks to set up branches and ATMs anywhere. One objective of branch licensing is to force banks into under-banked areas in exchange for permission to enter lucrative urban areas. This is an obligation that will have to be revisited as competition increases in urban areas, according to the panel.

In the equity markets, the environment needs to be made more conducive to private equity, venture capital and hedge funds. Mutual funds and pension funds should play a more active role in governance. The panel proposes to bring all regulations of trading under the Securities and Exchange Board of India (SEBI). It also wants to stop creating investor insecurity by banning markets. If market manipulation is the worry, take direct action against those suspected of manipulation, the panel said.

The panel intends to set up a few agencies while weakening the functioning of RBI, points out economist Rajan Varughese.

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