FM to have last word in FSDC

First meeting scheduled around month-end.

The finance ministry is going ahead with its plan to be the final authority in the proposed Financial Stability Development Council (FSDC) structure despite Reserve Bank of India’s (RBI’s) objections.

Though the final guidelines for the proposed council are yet to be formulated, it has been decided that issues which elude consensus within the FSDC sub-committee – headed by the RBI governor – will be automatically referred to the finance minister, who will chair FSDC.

Industry sources say this translates into the finance minister’s intervention on most issues as there is hardly any consensus at such meetings. Even the High Level Co-ordination Committee (HLCC) was unable to agree on most issues, they said.

The first meeting of FSDC has been scheduled around the end of this month and will be attended by the heads of the four regulators, the finance secretary, the banking secretary, the director general (department of currencies) and the finance minister. Interestingly, RBI deputy governors are not included in the sub-committee, though they are invitees to the present HLCC. With FSDC in place, HLCC will die a natural death.

In response to the draft guidelines, RBI had suggested that the governor-chaired sub-committee be given the authority to sort out regulatory disputes and the matter be referred to a higher authority only if the chairman was unable to resolve any issue.

In the initial proposal for FSDC, two sub-committees were envisaged. The one on regulatory coordination was proposed to be chaired by the RBI governor, with the finance secretary heading the sub-committee on financial stability.

RBI objected on the grounds that the functioning of FSDC was likely to impinge on regulatory autonomy and flexibility. “This may affect the ability of the sectoral regulators to act in a timely manner, taking into consideration the specific compulsions and circumstances of the sector concerned,” the central bank had said.

Following RBI’s observations, the government and the regulator reached a compromise formula, under which it was agreed that while the finance minister would head the proposed body, the governor would head the only sub-committee of FSDC.

The terms of reference of FSDC include inter-regulatory co-ordination, financial stability, financial literacy and inclusion, and sector development. Interestingly, they also mention that “any other issue” deemed fit by the chairman or the council could be taken up.

The government also differs with RBI on financial stability being the exclusive mandate of the latter. Sources said the government was of the view that RBI would not be able to ensure fiscal or social stability as well as the government. The finance ministry also cited the recent global financial crisis where governments played a more critical role to restore normalcy.