FSDC meeting: A sparse agenda points to the Council's growing irrelevance

So far, FSDC has only been about trivial details, forming sub-committee after sub-committee, without exercising the authority its mandate allows it, even as long-standing disputes remain unresolved

The Financial Stability and Development Council (FSDC), established in 2010, and whose 20th meeting was held on Tuesday, is a ‘super-regulator’ on paper at least. It is supposed to be a forum where issues that affect the country’s financial and regulatory framework, and their solutions, are discussed threadbare.

The FSDC brings all the financial sector regulators on one table to handle matters relating to financial stability, inter-regulatory coordination, and financial sector development, as its own terms of reference notes.

However, going by the latest meeting, and those before it, there are growing concerns about the FSDC’s irrelevance. So far, the FSDC has only been about trivial details, forming sub-committee after sub-committee, without exercising the kind of authority its mandate allows it. Long-standing disputes or contentions remain unresolved, and while there are informal and formal channels that the government and the regulators use to communicate with each other, a body like FSDC has not been utilised as much as it should have.

Here are the major points of disagreement since the beginning of the calendar year between the government and the RBI: The Rs 10 trillion worth of stressed assets in the books of banks and how best to solve the NPA crisis, the regulation of state-owned banks, the Financial Resolution and Deposit Insurance Bill, the Punjab National Bank scam, the liquidity crisis in non-banking financial companies, the differences over the prompt corrective action (PCA) framework, the crisis in IL&FS, and fresh debates over the independence of the central bank. These are the kind of issues, affecting companies, investors, stake-holder and financial markets cutting across sectors, that the FSDC was set up to deal with.

In the 10-month period starting January, there have only been two FSDC meetings. One in June, and one on Tuesday. Only one of the topics mentioned above featured in the discussions in the latest meeting.

On Tuesday, the government and the RBI once again disagreed on the liquidity situation in non-banking financial companies (NBFCs) and the need for a separate payments regulator, with the government wanting the banking regulator to relax its liquidity squeeze.

Finance Minister Arun Jaitley, who chaired the meeting, told the RBI to ensure adequate liquidity in NBFCs was maintained and there was no knock-on effect on other NBFCs and other sectors. For its part, the RBI said that the cash crunch the NBFCs faced wasn't widespread and the data with the regulator showed that there were no systemic issues.

A discussion on NPAs was on the agenda, but did not proceed, as per sources.

Here’s another thing. As far as the liquidity crisis is concerned, the Finance Minister had the exact same conversation with the chiefs of six state-owned banks last week. Jaitley told the banks to ensure there wouldn't be a liquidity contagion, and the banks said they had the financial means to lend more to the NBFCs. Hence, in a way, the FSDC’s discussions on the same topic were partly negated by the minister’s discussions with the banks.

Take another example, of the RBI’s February 12 circular, which abolished alternative avenues to deal with stressed assets outside the Insolvency and Bankruptcy Code. Such a huge decision is something the FSDC should have met for and discussed. Its last meeting before that was in December 2017, and the one after that was in June 2018.

The February 12 circular wasn't on the agenda of the December FSDC meeting. One does not know if it figured in June, because there was no press release for that meeting. In fact, the government, the Insolvency and Bankruptcy Board of India (which was then not even a part of FSDC), all other regulators and stakeholders were blind-sided by the circular.

Another example is the acquisition of 51 per cent stake in troubled state-owned lender IDBI Bank by insurance behemoth LIC, a deal which has repercussions across sectors and regulatory frameworks. Just a few weeks before the deal was approved by the Insurance Regulatory and Development Authority, the FSDC met on June 14. The LIC-IDBI deal was not a part of the agenda.

The FSDC was reconstituted in May partly because of the exigency created by Jaitley’s illness, to include Piyush Goyal, who then had the temporary charge of the finance ministry. It had also brought in the chairman of the bankruptcy board, the secretary, department of information technology and the revenue secretary to the high table. While no reasons were given for the expansion, their inclusion is meant to suggest this is the body to keep a tab on the financial sector.

FSDC was created in the aftermath of the global financial meltdown in the spirt of similar institutions created in the United States to handle regulatory uncertainty. The kerfuffle created between the Securities and Exchange Board of India and IRDAI around the same time about who gets to control the market for ULIPs was the proximate reason for its creation.

It took over the role of the high-level committee on capital markets created after the Harshad Mehta scam of early 1990s. Every time a disturbance hit the financial sector, it was progressively given more room to create more noise. Not surprisingly, the formation of FSDC was immediately termed as that of a super regulator.