Book Reviews
Book Review: The Alchemists

The fascinating story of central bankers

Central bankers are probably the most powerful...

Premium Content
Monthly Digital Access

Subscribe

Already A Subscriber?
Login
Yearly Digital+Print Access

Subscribe

Moneylife Magazine Subscriber or MSSN member?
Login

Yearly Subscriber Login

Enter the mail id that you want to use & click on Go. We will send you a link to your email for verficiation
Should the RBI be made more accountable? —Part1

The time is now ripe to make the RBI more accountable to the people of India. With its wide ranging powers and greater impact on all aspects of the economy, the accountability of RBI assumes even greater importance and should not be ignored.

When I was growing up in the 1960s/1970s, the RBI governor could perhaps walk down the main street of any Indian metropolis unnoticed. That is not the case today. In India as well as many other countries, these unelected officials are so much in the media glare. In fact, their actions and words are the subject of much heated debate in newspapers, TV channels and the like. Thus, there is no escaping the fact that from being ‘behind the scene actors’, central banks have now been forced to assume very public (multi-faceted) roles —ranging from setting monetary policy to supervision of financial institutions and the like. Through their participation in the Basel framework, many central banks are involved in establishing global standards for the regulation of the banking sector as well. Thus, they are therefore legitimately seen as the primary guardians of the integrity of the global financial system in a general sense, especially at this time of global economic crisis.

 

Indeed, the continuing global economic and financial crises has pushed central bank further to the forefront simultaneously as originators of the crisis and as well as potential saviours (of their countries) from these. Many central banks have in fact admitted at least partially, if not completely, responsibility for the circumstances resulting in the current set of international economic and financial problems. They have also promised to do better. As Ben Bernanke, chairman of the Board of Governors of the Federal Reserve, is said to have told Congress in 2009, “There were mistakes made all around. … We should have done more [in banking supervision]. We should have required more capital, more liquidity. We should have required tougher risk management controls.”i

 

Thus, without any doubt, the world over, central banks have engaged a greater variety of tasks than what they were originally established for. They are also handling very large sums of public money. While the increased role for central banks is perhaps here to stay, this added responsibility has naturally fuelled the demand for enhanced transparency and greater accountability on their part. That being the case, several legitimate questions arise regarding the accountability of central banks and transparency of their operations:
 

a) To whom should central banks be accountable?
 

b) What is expected of central banks in the name of this accountability and transparency?
 

c) How transparent should that accountability be to the media and to the larger public?

 

These questions are equally relevant to India’s central bank —Reserve Bank of India (RBI). We specifically explore, in a series of articles, how accountable and transparent the RBI has been. However, before looking into the above questions, let us first look at RBI’s mandate, which is rarely well understood!

 

A reading of the preamble to the RBI Act, 1934 describes its main functions as follows:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."ii
 

Likewise, other Acts provide additional mandates and the various core and additional functionsiii performed by the RBI are summarised in Table 1 below

 

Table 1: Functions and Mandates of The Reserve Bank of India

Functions of RBI

Legal Basis for

Performing Function

Classification of Function

Issuing of currency

RBI Act

Core Function

Acting as Monetary Authority

RBI Act

Core Function

Regulation of NBFCs

RBI Act

Additional Function

Management of Foreign Exchange Reserves

RBI Act

Additional Function

Management of Sovereign Debt (Central government)

By Statute

Additional Function

Management of Sovereign Debt (State governments)

By Agreement

Additional Function

Regulation of forex, money and government securities markets and their derivatives

Mandates from Various Sources

Additional Function

Regulation and Supervision of Commercial Banks and Cooperative Banks

The Banking Regulation Act, 1949

Additional Function

Regulating the Foreign Exchange Market   

The Foreign Exchange Management Act, 1999

Additional Function

Regulation and supervision of the payment and settlement systems

The Payment & Settlement Systems Act, 2007

Additional Function

           

As can be seen from the above, the RBI is therefore, what one would call as a “complete full service” central bank as it:

a) Is the issuer of currency;

b) Is the monetary authority;

c) Regulates and supervises banks, non-bank financial companies and other critical segments of financial markets in India;

d) Is the banker and debt manager to the government;

e) Acts as the gate keeper of the external sector; and

f) It regulates and supervises the payment and settlement system among other things.

 

Further, because the RBI is the monetary authority and it is also empowered to act as the banking sector regulator, the primary responsibility for financial stability also lies with RBI.

 

This is not all.

 

In reality, RBI’s statutory mandate is, perhaps, much broader compared to many of the other full service central banks because, historically, the RBI has played a key role in the overall development agenda of India. Innovations like credit to the agriculture sector and MSMEs (micro, small and medium enterprises), the lead bank scheme, the various priority sector categories, targets and associated lending, the fairly recent emphasis on financial inclusion and financial literacy have all flowed from this development role of RBI. In fact, the huge development finance institutions (DFIs) that exist (in India) today—such as, NABARD and IDBI—are, strictly speaking, offshoots of the RBI. The RBI has done much more than a typical full service central bank. And with the advent of the global financial crisis, RBI’s role has only increased further!

 

Given the above discussion, one is tempted to ask: how accountable has the RBI been and how transparent are its operations?

 

Indeed, I was surprised to find that there is no formal mechanism of accountability enshrined in the RBI Act and I quote Dr Subbarao, former governor, RBI who argued that:

 

“Neither the RBI Act nor any rules lay down a formal accountability mechanism. In the absence of a specific formulation, the fallback is on the general principle underlying a democracy—which is to render accountability to the parliament through the Finance Minister. The Reserve Bank assists the Finance Minister in answering parliament questions that pertain to its domain. Besides, the Standing Committee on Finance of Parliament summons the Governor for testimony on specific issues including legislations under consideration.”iv

 

And surely, this lack of this accountability and transparency seems to be showing on the ground as highlighted by the spate of recent (not-so-transparent) incidents involving the RBI:

 

First, was the case of Mr KM Birla, who initially did not resign from the RBI board despite his group company having applied for a banking license. In fact, RBI’s handling of this conflict of interest matter was very indecisive (referring it to the Union Government) until Mr Birla was forced to resign because apparently a member of the Parliamentary Standing Committee on Finance (PSCF) objected. It is entirely another matter that Mr Birla has recently been named in the CBI first information report (FIR) in the coal scam. A person like Mr KM Birla, whose companies had a strong commercial interest in financial services through the Aditya Birla group companies, was allowed to serve on the RBI board (uninterrupted) for many years suggests that he could have perhaps even lobbied for the entry of large business industrial houses into banking. The results are there for everyone to see as when the RBI called for banking licenses in 2013, they strangely permitted the entry of large industrial business groups into banking, a practice hitherto avoided in several countries globally. This, in fact, vitiates the entire bank licensing process in a significant manner.

 

Second, as the Mint writes and I quote, “Two months after the deadline for applications for new banks expired, there have been two changes in the list of applicants. One, Value Industries Ltd, a unit of Videocon Industries Ltd, has withdrawn its application for a banking permit, and two, Chandigarh-based real estate and hospitality company KC Land and Finance Ltd has sought a banking licence. The original list of 26 permit seekers, released by RBI on 1 July, did not have this name. Many are finding the sudden appearance of a new applicant and withdrawal of the Videocon group mysterious.” Whatever be the reasons, I am not sure that the above represents the procedural transparency required of institutions like the RBI.

 

Third, when the Hon Parliamentary Standing Committee on Finance (PSCF) was seized of the bank licensing matter, RBI’s hurried decision to grant banking licenses cannot be rationalised at all. In my humble opinion, irrespective of whatever the RBI says, this action by the RBI (alone) carries huge implications because it shows utter disrespect for parliamentary democracy. 

 

Fourth, the banking selection advisory panel has significant conflicts of interests and many weaknesses as enumerated in Moneylife articles. It should also be noted that the Banking Selection Advisory Panel includes several past regulators, who, in my humble opinion, will not be able to dispassionately and objectively analyse past regulatory and supervisory failures at RBI —an aspect so critical for making decisions with regard to providing bank licenses to large industrial corporate groups and NBFCs MFIs. Further, it also needs to be emphasised that many panel members have had (and some continue to have) strong associations with institutions that were at the heart of the 2010 AP micro-finance crisis. Finally, the panel also includes regulators whose questionable approach (and actions) during the years preceding the October 2010 AP micro-finance crisis had serious consequences in the ground. These certainly, resulted in some form of regulatory/supervisory failure which, in turn, exacerbated the 2010 AP micro-finance crisis. Therefore, I am not sure that due thought and procedure has been applied to deciding on the composition of the Dr Bimal Jalan Banking Selection Advisory Panel.

 

Fifth, the suddenness with which a new committee on financial inclusion (FI) was appointed by the RBI really surprised everyone because a live committee on the same subject has already been functioning at the RBI under senior deputy governor, Dr KC Chakravarthy, since 2012. That is not all. As noted in previous Moneylife articles, the composition of this new financial inclusion (FI) committee has left a lot to be desired as many members of this (FI) committee have significant conflicts of interests. Apart from being closely related to each other in a professional sense, a couple of the members of the FI committee represent institutions that have directly applied for the banking license. Also, there are many members of the committee who represent (and/or serve on the boards of) institutions that have significant relationships with various banking license applicants.

 

Further, many of the institutions — that the new financial inclusion committee members represent (directly or indirectly) — also have very significant commercial interests in the area of financial inclusion. And what is really shocking is that this insider (industry) committee with the above characteristics is to draft the overall vision and recommend the regulatory architecture for the broad area of financial inclusion. This is surely, a recipe for big time disaster as past global crises have clearly demonstrated. And the icing on the cake is the fact that this financial inclusion committee runs parallel to the banking selection advisory panel (in terms of its time frame) and the chair of the financial inclusion committee is also a member of the banking selection advisory panel. As noted above, recall that two banking applicants are themselves part of the financial inclusion committee and also that several members of this FI committee represent institutions (directly or indirectly) that have provided (or are providing) debt, equity and other support (in a commercial manner) to the banking applicants and other micro-finance industry players —in other words have significant professional interest in these banking applicants as well as other micro-finance institutions, some of whom were also involved in the 2010 AP micro-finance crisis. As a reputed professor of finance at IIM so aptly put it, the new RBI financial inclusion committee, has no CONFLICTS but ONLY interests.

 

Sixth, when the Hon PSCF, is looking at the broad subject matter of financial inclusion through the prism of the Micro-Finance Institution Development and Regulation (MFIDR) Bill, RBI’s action of appointing a new financial inclusion committee smacks of total disregard for the Indian Parliament. I simply do not understand the need for pre-empting Parliament!

 

In summary, given the above, I strongly feel that the time is now absolutely ripe to make the RBI, India’s central bank, more accountable, to the people of India. With its wide ranging powers and greater impact on all aspects of the economy, the accountability of RBI assumes even greater importance and should not be ignored. Indeed, as Mr Surjit Bhalla and others have long argued, The time has come for accountability at the RBI. This institution makes decisions that affect the fortunes (lately misfortunes) of many Indians, rich and poor.”v And this accountability will have to come in several transparent ways and these are discussed extensively in a sequential article.
 


i Source: Senate hearing, December 2009. (and as cited from other web documents)

ii Source: RBI Act of 1934, 2 of 1934, page 12 of pdf file from RBI site - http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.pdf

iii Compiled from various Acts and documents available on RBI site, www.rbi.org.in including speeches of past RBI governors. When I say additional function, I am strictly interpreting what has been said by past Governors like Dr Subbarao and also the documents available on the RBI site. I am not implying any hierarchy in functions, as far as the RBI is concerned

v http://www.indianexpress.com/news/holding-rbi-accountable/888648/

 

(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)

 

 

User

COMMENTS

S V TANEJA

3 years ago

RBI has numerous functions and responsibilities and for the proper discharge it is necessary that accountability is in place. Without accountability there is bound to be lethargy on the part of employees and in exceptional cases malafide intention too. In view of better governance, accountability and stricter penalties is necessary to obviate happenings of frauds.

Gopalakrishnan T V

3 years ago

The article is very well written and has convincingly argued to fix accountability of RBI to the people of India for their fortunes and now the misfortunes. The RBI's core functions and additional functions are by and large carried out to the best of its professionalism and are presented before the Parliament and the Parliament Standing Committee on Finance.No doubt, RBI's functions often give rise to conflict of interest and this results perhaps in the necessity for fixing accountability for RBI.The reasons are not far to seek in making RBI working perhaps not in the interests of bringing in economic inequity. The RBI does not enjoy the autonomy as it deserves as a full fledged Central Bank. All its Directors are appointed by the Central government and they are not expected to dissent from the thinking of the Ministry of Finance or the Government. Unlike many Central Banks of the world, RBI has been entrusted with the responsibility of rural development by statute and other developmental functions apart from core Central Banking functions. Though NABARD has been set up exclusively for Agriculture and Rural Development, RBI has not been relieved of the development of agriculture and rural development. The Financial Inclusion cannot be the exclusive responsibility of RBI where the involvement of State, central and other agencies have an active role and responsibility taking into account the envisaged social and financial role of various financial institutions functioning both in rural and other areas. No doubt RBI has to be made accountable for its functions,but given the present circumstances,there are many aspects to be looked into taking into account the relationship between the RBI and the Government,the socio- economic conditions of the country and the general governance standards and accountability. The author's approach , however,deserves appreciation and a lot has to be done before the objective is set.

REPLY

Ramesh S Arunachalam

In Reply to Gopalakrishnan T V 3 years ago

Thank you sir for your detailed views. I appreciate what you are saying and I have said that the RBI's role is far greater than that of even a full service central bank. That said, whether fair or not, we tend to judge institutions by their own standards and I must say that the standards for RBI will be always higher because it has traditionally set higher standards than other regulators. So, please take it in that perspective. In fact, that is why my concern related to a spate of recent events, which seem un RBI like (in its traditional form). Also, as RBI's roles have expanded significantly, I am sure that there is always scope for performance enhancement. Thanks very much for your points on autonomy and other aspects and these are well taken sir and I will factor these in as I write the sequential articles. For ordinary people like me, a debate like this is also useful as it helps clarify things. Thanks again sir

MOHAN

3 years ago

This Is How Our Central Bank Work

http://creative.sulekha.com/infocus-on-r...

nagesh kini

3 years ago

Ramesh's article only reconfirms all that I've stated in my article "Indian Banking scenario and the RBI's new avatar" carried yesterday.
The RBI has gone a long way since it was started and more water has flown down the Thana Creek, Mumbai and Jamuna Bridges!
1.Like the US Fed. Res. Gov. the appointment of the RBI Governor ought to be confirmed by the Parliamentary Committee.
2. RBI is no holy cow, it's accounts need to be subjected to CAG Audit.
3. They sat on the Damodaran Committee Report for long, it required a RTI query to force them to put it out.
4. Why Nachiket Mor Committee when FSRLC Committee has covered much the same ground?

REPLY

Ramesh S Arunachalam

In Reply to nagesh kini 3 years ago

Thanks Sir for your kind feedback and your very insightful article, which I liked very much. We will be incorporating all these even as we bring in a crucial distinction in Governance of Central Banks. Traditionally, there has been a greater focus on policy governance but aspects like those stated above by you and others will fall into the institutional governance realms, which has hitherto been neglected. As a child, when I was growing up, I have always heard the phrase, "Charity begins at home" and most certainly, the RBI, which expects Good Governance and Accountability from other institutions must likewise focus inwardly on institutional governance. More in my articles and thanks again sir. I am learning a lot from all of you and thanks sir. Have a nice day!

nagesh kini

In Reply to Ramesh S Arunachalam 3 years ago

Of all the Regulators, SEBI, IRDA, TRAI or ICAI, RBI has been relatively more efficacious as a Watchdog.
There is much more scope for improvement. As vital stakeholders, we all, you and I do have a role to play in pushing for more reforms by virtue of our long experience and exposure, more particularly as users and professionals in the in depth know of the state of affairs. After all a person who actually wears the shoe knows where it pinches. Not arm chair activists sitting in air conditioned ivory towers! Over to you.

SuchindranathAiyerS

3 years ago

The more traditional Central Banks such as Sweden and Britain have nothing much to offer beyond a reading of DeKock. But, the History of the Reserve Bank of New Zealand is well worth a study on how accountability needs to be brought to bear on a Country's Central Bank. Their Annual Reports for 1997,1998,and 1999, say a great deal from which India should learn.

REPLY

Ramesh S Arunachalam

In Reply to SuchindranathAiyerS 3 years ago

Thanks Sir and I was going to use their example (Reserve Bank of New Zealand) but thanks again and will factor your suggestions in appropriately

Thanks sir and your kind comments are much appreciated!

Insurance Fraud: A 28-hour chase to nab a person with seven names!

A bizarre tale of Bajaj Allianz’s efforts to catch a fraudster depicts the difficulties during the chase. The story ends with a twist of finding that the offender was actually trying to defraud 11 other insurers. He had seven PAN cards and seven names

A long chase to nab an offender would be a normal course of work for a policeman, but it sounds strange for an employee of Bajaj Allianz General Insurance. This is precisely what happened with Sandeep Sarpande, assistant manager—corporate legal, who joined two policemen, from the Vimantal Police Station in Pune, and embarked on an arduous journey to nab the offender. They started at around 5am on a sunny morning for Mumbai, where the offender was residing. While the constables were tuned to the FM radio blaring in the vehicle, Sandeep was reminiscing as to how the crook could do everything so perfectly!

 

The crook had a Bajaj Allianz health policy and lodged a claim for reimbursement of his hospital expenses, where he was admitted for fever. When the Health Administration Team (HAT) claim team received the documents, they were a bit surprised at the claim amount of Rs55,000 for a simple fever! They scrutinised the claim documents and found that everything was perfect!

 

The inconsistency of the huge amount and a perfect documentation set the alarm bells ringing. The scrutiniser referred the case to their in-house fraud control team at HAT. The team investigated and checked with the hospital to ascertain the treatment costs and the medical protocol. To their astonishment, they found that the claimant was not admitted in that hospital though the documents provided were from the hospital.

 

After a thorough investigation, the hospital gave it in writing that the claimant was never admitted nor was given any consultation. When they probed a bit more, they came to the conclusion that the claim documents were forged. They confronted the offender on phone and he said that the documents were genuine. It was then decided by the legal team that an FIR be lodged at a police station against the claimant. Once the FIR was lodged at Vimantal police station in Pune, the next step was to arrest the offender and take it to the logical conclusion.

 

The vehicle suddenly came to a halt and jolted Sandeep. He realised that they had reached Bhayander, a distant suburb of Mumbai. As per the policy records the offender was residing in Bhayander. When they reached the flat they found it locked. They checked with their neighbour and were shocked to hear that nobody stayed in the flat by the claimant's name.

 

The police team then asked as to who owned the flat and the neighbour promptly provided the owner's contact details and the address where he stayed. Luckily, it was not far away but a 10km drive from where they were. When they reached the owners place they were in for another shock as he said that he has not rented his flat to someone by the claimant's name.

 

Sandeep and the police constables then gave a description of the claimant. Based on the description, he gave the leave and license agreement which led to the claimant's actual name and photograph. The agreement also revealed that he was employed in a franchisee outlet of a leading telecom operator. Their next location was the franchisee outlet in Malad, a sprawling suburb of Mumbai. But this too yielded no result. With no clues about the offender’s whereabouts, Sandeep was back to square one.
 

The police constables seemed to lose interest and it was already late in the evening. But, Sandeep was determined to nab this guy and motivated the constables by saying that by coming so far they should not return empty-handed. They once again returned to the franchisee outlet and again enquired about the offender. After a lot of persuasion, one of

 

Update from Bajaj Allianz

1. The concerned offender was in Police custody for 12 days and judicial custody for 20-25 days. He was produced at the Magistrate Court at Pune. Currently, he is out on bail and the hearing is going on.

2. We have filed a case only for forgery and defrauding Bajaj Allianz. In the charge sheet, the case of multiple identities and PAN cards, along with other forgery offences are included.

his colleagues who happened to visit the outlet informed that the offender very much stayed in Bhayander but not at the address as per the policy records, but at a place which is a good 30-40km from there. They immediately took off for this new location, with great hope.

 

When they reached there, the wife of the offender panicked at the sight of police authorities and informed that he hasn't reached home yet. The police authorities knew that she was terrified comforted her by saying that they were just enquiring. After waiting for an hour or so, the offender finally reached his home much to the relief of the anxious police constables. They held him and started enquiring about his forgery attempts and when they started the interrogation in their true police style. He quickly spilled the beans and revealed that he had similar forged claims to over 11 other insurers and was in various stages of claim processing.

       

They were amazed to find that he had reams of letterheads, rubber stamps and other stationery items of various hospitals at his place. But the most amazing thing was that he had seven PAN cards, 11 credit cards and above all seven names!

 

They arrested him immediately and when Sandeep glanced at his watch it was 11.45pm. Armed with their prized catch, they started their return journey and reached Pune at the crack of dawn at 3.30am. The offender was first taken to Sasson Hospital for a detailed health check-up as it is mandatory and finally put him in the police custody.

 

After finishing all the required paperwork and related process, Sandeep reached home at 9 am and crashed into bed. After 28-hours and a 700km chase they were finally able to nab the offender.

 

The police authorities produced the offender in the Pune court the same day. He is currently out on bail. The case is still being pursued by Sandeep who keeps a tab on the proceedings on a regular basis. He wants the offender to be punished which will serve as a lesson for other offenders.

User

COMMENTS

Kishor Chhabria

2 years ago

Sandeep can punish a policy holder with a genuine claim too... isn't it Sandeep

Bajaj Allianz... avoid buying a policy

Param

3 years ago

i wonder if this was possible without any 'support' from the company staff? who is going to investigate that part - coz there is no award for 'Find the crooked employee'...

REPLY

nagesh kini

In Reply to Param 3 years ago

Certainly there's got to be a 'deep inside connection' without which it is not possible.
In response to Mediclaim RTI query in one PSU the DOs concerned have the audacity to tell the PIO that the 'files/policies do not exist' even when there is ample evidence of the fraudulent settlement of the claim!

nagesh kini

3 years ago

The young man has to be a genius to own so many PAN and Credit cards with multiple addresses and con so many insurance companies with so many claims that got settled!

DEEPAK KHEMANI

3 years ago


Wow detailed reporting from MONYLIFE, What is required is exemplary punishment in cases like these which would set an example for others but sadly in our country the law is an *** and its a long drawn process and as you have reported he is already out on bail.
It is cases like these which make Insurance companies' reject genuine claims resulting in people mis-trusting the Insurance company which then may delay or deny legitimate claims.

Atiker

3 years ago

What about white frauds perpetrated by the insurance companies under the garb of fine print :)

REPLY

raj

In Reply to Atiker 3 years ago

There are two sides of a coin. Moneylife has highlighted the fine prints many times more than any other media. Fraud from consumers is also a reality that cannot be ignored.

raj

In Reply to Atiker 3 years ago

There are two sides of a coin. Moneylife has highlighted the fine prints many times more than any other media. Fraud from consumers is also a reality that cannot be ignored.

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)