FinMin makes first move on FSLRC despite Subbarao's reservations

Proposes to acquire DICGC from RBI, increase capital to Rs 3,000 crore

The government has made the first move to implement the contentious recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), despite the strong reservations of outgoing Reserve Bank of India (RBI) Governor D Subbarao.

In the last week of July, the finance ministry wrote to RBI Deputy Governor Urjit Patel, saying the government proposed to acquire RBI’s shareholding in Deposit Insurance and Credit Guarantee Corporation (DICGC), in line with FSLRC recommendations. Urjit Patel is chairman of DICGC, while RBI Executive Director Jasbir Singh is a board member.

The FSLRC had recommended the DICGC be subsumed into the Resolution Corporation. The FSLRC report called for a total overhaul of the existing financial system by merging the oversight functions of the market, commodity, insurance and pension regulators. The FSLRC, chaired by justice B N Srikrishna, had given its report to the government in March.

“The FSLRC recommendation that the executive responsibility for safeguarding systemic risk should vest with the (FSDC) Financial Stability and Development Council board runs counter to the global post-crisis trend of giving collegial bodies responsibility only for coordination and for making recommendations,” Subbarao had said. The views of Raghuram Rajan,  set to succeed Subbarao as chief of the central bank on September 5, on the FSLRC recommendations are yet to be known.

In Budget 2013-14, it was proposed DICGC’s credit guarantee fund would be used as an instrument to facilitate the flow of credit to education, housing and loans for skill development. “It is proposed the credit guarantee fund for housing, education and skill development would be subsumed in the existing credit guarantee fund of DICGC, with a view to realise economies of scale and scope,” said the ministry’s letter.

Apart from proposing to increase DICGC’s authorised capital to Rs 3,000 crore, the ministry also suggested giving the government the power to appoint directors, including the chairman. Currently, the chairman and the board are appointed by RBI.

All the proposed changes are part of the DICGC Amendment Bill, 2013.

Subbarao has opposed various proposals of the ministry on the grounds that these compromise the central bank’s autonomy.

Despite his objections, the government went ahead with the formation of the Financial Stability & Development Council, with the finance minister as the chairman and the RBI governor as head of a sub-committee. The ministry is also moving towards separating the debt management office from the central bank to an independent body. This, too, has been opposed by Subbarao.