Context:
A recent IMF–World Bank joint report, following an assessment of India’s financial system, has stressed the urgent need to enhance the independence and authority of India’s financial regulators through legislative and institutional reforms.
Key Concerns Highlighted
- Government Control Over Regulators: Current Indian laws allow the Ministry of Finance (MoF) to control the appointment and management of top officials at key regulatory bodies like the RBI and IRDAI.
- Overruling Regulatory Decisions: The MoF acts as an appellate authority for the RBI and has overridden major decisions in the past. For example, in 2019, the government reversed the RBI’s move to revoke a cooperative bank’s licence.
- Regulatory Constraints on PSBs and Insurers: The RBI lacks sufficient authority to enforce corporate governance measures such as:
- Forcing mergers of public sector banks (PSBs)
- Approving or removing board members
- Dissolving underperforming boards
Similarly, state-owned banks and insurers are governed by statutes that limit regulators’ intervention capabilities.
Major Recommendations
- Appellate Authority Transfer: The report recommends transferring the RBI’s appellate oversight from the Ministry of Finance to an independent agency, reducing political interference in regulatory matters.
- Strengthening IRDAI’s Powers: The Insurance Regulatory and Development Authority of India should be empowered to take direct supervisory actions against large public insurers, including the dominant state-owned life insurance company.
The global financial institutions argue that true financial stability in India hinges on granting regulators the autonomy and authority they need to act decisively—especially in the governance of public financial institutions. Legislative changes could be pivotal in safeguarding the credibility and integrity of India’s financial system.
