Reason for 2008 crisis was credit intermediation by non-banks

Banking as well as non-banking financial companies must be under a unified regulation of the central bank to prevent 2008- like crisis, Reserve Bank of India (RBI) Governor D. Subbarao said on Tuesday.

Dr. Subbarao said there were strong inter-linkages between banks and non-banking financial companies (NBFCs), and a ‘unified regulation by the same regulator’ was essential for financial stability.

The RBI Governor’s comment assumes significance in view of the government’s plan to take away the regulation of non-banking financial companies from the central bank, and put it under a unified financial authority.

Dr. Subbarao said any such move would prove detrimental to financial stability.

“For monetary policy to be effective, credit creation (that is, by banks and credit institutions such as NBFCs) should be regulated by the central bank,” he said, addressing an annual banking conference, organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Banks’ Association, here.

Referring to the 2008 financial crisis, Dr. Subbarao said the major reason behind the crisis was ‘credit intermediation activities’ conducted by non-banks or 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.

“Post-crisis, the trend has been to entrust more, not less, regulation to central banks,” he said.

Dr. Subbarao, who demits office on September 4, said none of the Indian banks were in the global league of large banks, and the country aspired to have at least a few “Indian multinational banks in the near future by selective acquisition.”

“Our biggest bank is ranked at about 60 in the global league of large banks. It may take years for our banks to become global players by way of organic growth,” he said.

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