Members from corporate world, who have stake in financial markets, pose serious conflict of interest

At the height of the global financial crisis in 2008 when liquidity crunch hit the Indian credit market, the then finance minister P. Chidambaram constituted a liquidity management committee headed by the then finance secretary Arun Ramanathan. The decision raised eyebrows as liquidity management is a key function of the RBI. (One of the meetings of that committee was held in the head office of a public sector bank in Bandra-Kurla Complex in Mumbai.)

An ‘annoyed and upset’ Duvvuri Subbarao, the then governor of RBI, called up the finance minister to say that he would not participate in the meeting. Mr. Subbarao himself penned the incident down in his memoir — Who Moved My Interest Rate - Leading the Reserve Bank of India through Five Turbulent Years.

The point is, even in such a turbulent economic circumstance, Mr. Chidambaram did not take specific policy-related issues to the RBI board. But things have changed now. In the last two board meetings of the central bank, specific issues such as bank capital, debt restructuring scheme, liquidity for non-banking finance companies and reviewing prompt corrective action framework, apart from economic capital framework, were discussed.

A statement issued by RBI after the November 19 board meeting, among other things, said, “The Board, while deciding to retain the CRAR at 9%, agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year i.e. up to March 31, 2020.”

MSME debt recast

On the issue of debt recast scheme for micro, medium and small enterprises, the board ‘advised’ that the RBI should consider a scheme for restructuring of stressed standard assets of MSMEs. On capital, it was clear that the decision was taken by the board. Clearly, the government wants the board to be more hands-on. However, the board has members from the corporate world who have a stake in the financial markets, which poses serious conflict of interest.

For example, the present board has N. Chandrasekaran, who is the chairman of Tata Sons, the holding company and promoter of more than 100 Tata operating companies, including Tata Capital — a non-banking finance company. There’re also Dilip Shanghvi, MD, Sun Pharma and Manish Sabharwal, Chairman of Teamlease.

The RBI board will discuss the issue of liquidity problems of NBFCs in the next board meeting on December 14, apart from governance issues, and corporate borrowers will be an obvious beneficiary if steps are taken to address the issue.

To avoid conflict of interest, the RBI board should be reconstituted with academicians and technocrats who have no business interest in financial markets and could aid the RBI management with valuable inputs.