Government of India Volume I: Analysis and Recommendations

NOTES OF DISSENT
6. The present arrangement is that while the Central Government determines the policy
for FDI, RBI, in consultation with the Central Government makes rules in relation
to other capital flows. This arrangement has worked well and even the U.K. Sinha
Working Group has not suggested any change to this basic arrangement. For the
reasons enumerated above, this basic arrangement must be allowed to continue.
18.4.2. Financial Regulatory Architecture
1. The Report proposes (See Chapter 14.4) that: “the financial regulatory architecture
suited for Indian conditions should consist of seven agencies” which will include:
◮ “Agency #1: A central bank that does monetary policy and enforces the consumer
protection and micro-prudential provisions of draft Code in the fields
of banking and payments”
◮ “Agency #2: UFA which enforces the consumer protection and micro-prudential
provisions of the draft Code in all finance other than banking and payments”
The proposal therefore is that RBI will only regulate and supervise banks and payment
system and that NBFCs and Housing Finance Companies(HFCs) will be regulated
and supervised by UFA.
2. I believe that it is essential that NBFCs and HFCs should be regulated by the same
regulator as regulates the banks i.e., RBI. My reasons are as under.
3. NBFCs are currently regulated and supervised by RBI. HFCs are currently regulated
and supervised by National Housing Bank (NHB) which is a 100% subsidiary of RBI.
Under the National Housing Bank (Amendment) Bill 2012 which is before the Standing
Committee on Finance of the Parliament, it is proposed that the ownership of
NHB will pass to Government and that regulation will pass to RBI with supervision
remaining with NHB. The transfer of regulation is considered necessary since banks
also do housing finance activity, the relative portfolio sizes being banks – 64% and
HFCs – 36%. There are currently 54 HFCs with a total asset size of Rupees 335,000
crores which represents roughly 4.1% of the total asset size of all scheduled commercial
banks.
4. NBFCs are also engaged in substantially the same activity as banks. They are asset finance
companies, infrastructure finance companies, micro-finance companies and
investment companies. They rely upon bank finance and are significant competitors
of banks, particularly in the retail banking sector. Individually and collectively
they are significant players in the financial system as shown below:
◮ There are 12,348 NBFCs registered with RBI of which only 265 accept public
deposits.
◮ The total assets of NBFCs aggregate to Rupees 1,038,000 crores which represents
roughly 12.7% of the total assets of all scheduled commercial banks.
◮ There are 376 systemically important NBFCs with assets which aggregate to
Rupees 923,000 crores, representing roughly 11.3% of the total assets of all
scheduled commercial banks.
◮ There are 42 NBFCs which have total assets in excess of the smallest scheduled
commercial bank and 2 NBFCs which have total assets in excess of the smallest
Public Sector bank.
5. As the Report points, (See Chapter 1.5.2) difficulties are created in addressing finance
regulation on a holistic basis, when there is the rise of a rapidly growing
shadow banking sector. As most knowledgeable commentators have pointed out,
154 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION