Too many cooks will spoil the dish
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.