Looking back at 2022: RBI's regulatory review 2.0 is a game-changer

It has taken nearly two decades for RRA 2.0 to be set up under Shaktikanta Das in November 2021; and its recommendations in June this year must surely go down as a major reform

Alan Greenspan, chairman of the US Federal Reserve from 1987 to 2006, once famously said, “If I seem unduly clear to you, you must have misunderstood what I said.”

It was a reflection of an era when central bankers around the world spoke in a tongue which even those who breathed the rarefied air of high finance and economics found hard to decipher. This was not restricted to monetary policy, but extended to commercial banking regulations as well.
 

In the Indian context, the post-reform period called for a comprehensive review of existing guidelines and a recalibration of the manner in which the banking regulator interacted with regulated entities (REs).

It was Y V Reddy as deputy governor (he was later appointed governor on September 6, 2003, and served in that position for five years) who set up the first Regulatory Review Authority (RRA 1.0) in 1999 to overhaul the set-up. The pole star for Reddy may well have been the 96th Report of the Law Commission of India (1984), which said: “Every legislature is expected to undertake what may be called the periodical spring-cleaning of the corpus of its Statute Law, in order that dead wood may be removed, and citizens may be spared of the inconvenience of taking notice of laws which have ceased to bear any relevance to current conditions”.

But we will never know for certain. Again, while the RBI did put out a press release on April 7, 2000, on RRA 1.0, it never named the members on it. “It was not an informal engagement. We did take feedback from banks, and in fact, the RBI even extended the term of RRA 1.0 by a year to 2001,” said a top source involved in the deliberations of the period.

It has taken nearly two decades for RRA 2.0 to be set up by governor Shaktikanta Das in November 2021 under deputy governor M Rajeshwar Rao; and its recommendations in June this year must surely go down as a major reform.

How is RRA 2.0 to be viewed?

In its scope, it seeks to incorporate some of the best practices from global central banks regarding consultation ahead of policy formulation; taking feedback from REs and trade bodies and structured meetings with banks’ chief executive officers and senior compliance officials. REs had long held the view that RBI’s guidelines have to be in step with market realities. It was an indirect way of conveying that RBI circulars were not adequately factoring in banking commercials.

In the United Kingdom, both treasury and regulators are obliged to support stakeholder engagement with the policy-making process and to ensure it is rigorous, evidence-based and open to external challenge. Regulators are required to give an explanation of the representations received and how they have been assessed.

The Bank of Thailand holds ‘We Finetune’ meetings twice a year with senior compliance officers of banks. And this is followed by the issuance of consultation papers for feedback on updates to regulation. The Central Bank of Malaysia (Bank Negara Malaysia) reaches out to specific banks to seek inputs on potential changes that they intend to implement.

RRA 2.0 has said that “a periodic stocktake is useful to review the regulatory instructions and compliance procedures with a view to streamlining and rationalising them, and making them more effective.” While REs were obliged to comply with regulatory instructions, it has also been recognised that any gap in understanding, interpreting, and implementing instructions may lead to compliance with instructions in letter but not in spirit. Regulatory instructions are now expected to come with a brief statement of objectives underlying the rationale of proposed changes.

Now, to take a step back: what did RRA 1.0 set in motion?

It led to the compilation of master circulars by merging a number of standalone circulars on a particular subject. These covered credit, statutory audit, prudential norms and provisioning, bank frauds, export finance, and priority sector lending. Another noteworthy achievement was the decentralisation of the work to fix service charges — it had until then been taken care of by the Indian Banks’ Association, and the Foreign Exchange Dealers Association of India. It was left to banks to work out and levy service charges based on the cost of providing these services.

There were three other significant steps: the sample test checking of newly-printed MICR instruments at cheque-processing centres before putting them into use was scrapped; regulation of money market mutual funds (MFs) was handed over to the Securities Exchange Board of India; and MFs were permitted to issue units to foreign institutional investors.

These may come across as quaint now, but were important at the time. “It cut the cost and time in both enforcing and adhering to compliance. Back then bank CEOs had to inform the RBI if they wanted to go on leave or go aboard,” said another source in the know.

But these went unheralded as reforms.

It is now up to REs to take advantage of the new “open door policy” of RRA 2.0 and foster a better engagement with the RBI; and to better understand the concerns of the regulator rather than merely making submissions from a commercial point of view. The legacy of REs is more important to the central bank than that of incumbent managements.

The scope of RRA 2.0

• Ease the compliance and regulatory burden
• Streamline the reporting mechanism
• Issuance of regulatory instructions with a standardised glossary
• Better dissemination as well as ease of accessibility of regulatory instructions
• Withdrawal of obsolete and redundant instructions 
• Makes a case for the withdrawal of 714 circulars