The World Bank, in its India Financial Sector Assessment (FSA) Report, has called for strengthening the powers and independence of financial regulators through legislative and institutional changes.
The report notes that under the Banking Regulation (BR) Act, IRDAI Act, and SEBI Act, the government retains control over senior management and the boards of regulators. It points out that the Ministry of Finance (MoF) acts as the appellate authority for the Reserve Bank of India (RBI) and has the power to overturn its supervisory decisions.
According to the report, this power was first exercised in 2019, when the MoF took up the appeal of an Urban Cooperative Bank (UCB) and overturned the RBI’s decision to revoke its license.
The World Bank staff recommended transferring the appellate authority from the MoF to an independent agency to ensure supervisory autonomy.
The report further observes that state-owned banks and some insurers are governed by separate statutes that limit regulators’ powers, and the government retains authority to remove RBI and IRDAI board members and issue directions to them.
Very timely and important read. Strengthening regulatory independence in the financial sector, especially for co-operative banks, seems essential if we want a more resilient system. It will be interesting to see how this autonomy plays out in practice and what mechanisms are put in place for accountability.