Indian Financial Regulators Need More Autonomy: IMF-World Bank Report

Syllabus :GS3/Economy  

In News

• A global report on India’s financial system, based on an IMF-World Bank assessment, suggests strengthening the power and independence of financial regulators (including the RBI, SEBI, and IRDAI) through legislative reforms.

Financial Regulators In India

• India’s financial system is regulated by various authorities that ensure transparency, stability, and accountability in the markets.
  • These regulators are crucial for maintaining a fair, orderly, and efficient financial environment, which supports the growth and development of the economy.

Major Regulators 

• The Securities and Exchange Board of India (SEBI): It is the apex regulator for the securities market in India, tasked with safeguarding investor interests and promoting the development of the securities market.
• The Insurance Regulatory and Development Authority (IRDA): IRDAI regulates and promotes the insurance industry in India.
  • It ensures the growth of the insurance sector and protects the interests of policyholders.
• The Reserve Bank of India (RBI) conducts the country’s monetary policy.
  • The RBI is India’s central bank and acts as the primary regulator of the banking system in the country.
• Pension Funds Regulatory and Development Authority (PFRDA) : PFRDA regulates the pension sector in India, focusing on the National Pension Scheme (NPS) and other pension products.
• The Ministry of Corporate Affairs (MCA): it regulates corporate affairs in India through the Companies Act, 1956, 2013 and other allied Acts, Bills and Rules.
  • MCA also protects investors and offers many important services to stakeholders.
• The Ministry of Finance: It is responsible for the country’s economic matters, serving as the Treasury of India.
  • It focuses on taxation, financial legislation, financial institutions, capital markets, as well as managing central and state finances, including the Union Budget.

Issues and Concerns 

• Government influence over regulator decisions: Current legislation enables the Ministry of Finance to exercise control over the boards and senior management of regulatory bodies.
• Limited autonomy of RBI: The Ministry of Finance acts as the appellate authority for RBI, with powers to overturn supervisory decisions. Notably, in 2019, the government reversed the RBI’s move to revoke the license of a small urban cooperative bank.
  • The RBI’s authority over state-owned banks and insurers is restricted — it cannot easily enforce board changes or mergers in these institutions.
• Governance gaps in insurance: IRDAI has limited tools to act decisively against state-run insurers, which hinders reforms and efficiency.

Importance of Autonomy in Financial Regulatory Bodies in India

Recommendations

• The IMF-World Bank report suggests transferring the MoF’s appellate authority to an independent agency, empowering the IRDAI to take decisive actions against state-owned life insurers, and separating the functions of an insurer’s board from executive management to improve corporate governance.
• The RBI should also issue clearer guidance on board oversight and eliminate conflicts of interest, such as placing its staff on bank boards.
• Additionally, the report calls for strengthening the capital base of public sector banks (PSBs) to handle liquidity shocks and recommends better supervision of financial conglomerates, including addressing climate-related financial risks.
• Stress tests show that scheduled commercial banks (SCBs) have enough capital for moderate credit growth, but PSBs have less capacity.
  • While mutual funds and bond funds are resilient, risks from asset liquidations in the corporate debt market require further attention.
• SEBI’s steps to address risks in securities markets are praised, and it is advised to enhance macroprudential oversight and improve cybersecurity resilience beyond the banking sector.

Conclusion and Way Forward 

• To ensure a more stable and resilient financial system, India’s financial regulators need greater autonomy and authority to make independent, timely decisions.
  • Strengthening their independence will also help improve governance, risk management, and overall financial sector stability.

Source :TH