Worsening bank asset quality poses near-term risk to India, says IMF but RBI disagrees

The financial sector regulators do not enjoy de jure status in India but their "de facto position too reveals no interference in the functioning of regulators" by the government, Reserve Bank said in its comments on the IMF's Financial Stability Report on India.

The IMF report said that the financial sector regulators in India "lack of de jure independence, which can be rendered more challenging by the intricate relationship with state-owned supervised entities and their business decisions".

RBI, however, added that IMF's suggestion "merits consideration" as the regulators have to function within the framework of policies framed by the government.

The apex bank said that the government had set up a Financial Sector Legislative Reforms Commission (FSLRC) to suggest steps to streamline and further strengthen the statutory framework comprising an array of statutes enacted since 1930s. The FSLRC is expected to give its report by March 2013.

Moreover, the RBI said steps were underway to accord a statutory basis to the pensions regulator.

With regard to IMF's observation on large exposure limits, RBI said it was not possible to follow the international norms with regard to group borrower limit as it would hamper the growth of economy.

The IMF report said that the Indian economy faces near-term risks of worsening bank asset quality and pressures on systemic liquidity.

Referring to moral hazard issues following appointment of nominees on bank boards by RBI, RBI said: "the system has served India well and ensured more effective compliance with RBI regulations from the banks' side.

"Nevertheless, RBI is sensitive to the issue and has taken up the matter with Government of India for amendment of the enabling legal provisions", it said.

The IMF's report is part of the review of 25 systemically important economies under the Financial Stability Assessment Programme (FSAP).

Besides other issues, the IMF report had identified gaps in international and domestic supervisory information sharing and co-operation, consolidated supervision of financial conglomerates, and some limits on the 'de jure' independence of the regulators like RBI and IRDA.

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