A few month ago, the banking and monetary regulator in India, the reserve Bank of India (RBI), assumed the responsibility of stimulating the economic growth, in addition to its primary responsibility of regulating & supervising the banking & money market institutions, formulating & implementing monetary policy to achieve the objectives of financial stability and price stability. Given the state of economy, no one could find any fault with the RBI assuming this additional responsibility. In fact the RBI was commended for taking this extra load.
It is very well accepted that a well-functioning, deep and
robust financial market is a must for economic development. On Wednesday, the
financial market regulator, the Securities and Exchange Board of India (SEBI)
assumed the additional responsibility for reviving the sagging Indian economy.
SEBI’s chairman reportedly said “SEBI is considering multiple steps to reboot
the economy through financial market reforms”. He said, “It will be challenging
to achieve the government’s ₹100
trillion investment target for infrastructure by 2024-25 unless the bond market
is adequately developed.”
Market regulator recognizing their role in the overall economic
growth and development of the country is a very comforting. They committing to
efforts for promoting economic growth and development is also welcome. However,
the regulators actively assuming responsibility for growth may not be
appropriate after all. All institutions and all citizens have a defined role in
the functioning of the economy. If all perform their assigned roles as per
their best abilities, the growth will happen automatically. The growth is
hampered when the one or more segments of the economy fail in the performance
of their assigned roles.
It is widely recognized that crisis in financial sector is
materially responsible for economic slowdown in India. Obviously, it reflects
poorly on the RBI’s ability to regulate and supervise the financial
institutions and delivery of credit.
In this context, it is pertinent to note the conclusions made in
a recent Working Paper of RBI, titled “Bank
Capital and Monetary Policy Transmission in India”. The “paper examines the
role of bank capital in monetary policy transmission in India during the post-global
financial crisis period. Empirical results show that banks with higher capital
to risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally,
banks with higher CRAR transmit monetary policy impulses smoothly, while
stressed assets in the banking sector hinder transmission. Recapitalization to
raise CRAR can improve transmission; however, CRAR above a certain threshold
level may not help as the sensitivity of loan growth to monetary policy rate
reduces for banks with CRAR above the threshold. Therefore, it can be
concluded that monetary policy can influence credit supply of banks depending
on their capital position. (emphasis supplied)”
The paper also concludes that “Presence of non-performing assets
in a bank also weakens monetary policy transmission and lowers the loan growth
rate. These results support the need for bank capital regulation in India.”
Similarly, multiple scams and malfunctioning of securities’
market institutions like Mutual Funds and Stock Exchanges have negatively
impacted the investors’ sentiments. SEBI must share some responsibility for
this also, and focus more on “Regulation” rather than “Reforms”. For, “Reforms”
is a function of policy making and not of regulation.
A large section of the market participants and investors
believes that “over regulation” and “misdirected regulation” by SEBI in past
few years may have caused more than damage to the capital markets and therefore
economy than SEBI’s reform measures would have helped anyone.
In my view, building a vibrant retail debt market is imperative
for the sustainable economic growth of the country. But this is a function of
the government. SEBI’s role should be limited to efficiently regulating the
market.
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