One report which was supposed to overhaul India’s financial sector was – Financial Sector Legislative Reforms Commission. One does not know the status of the report as there is lots of confusion around its status.
Though, parts of the report have gained traction and policy attention like those on setting an inflation target and constituting an MPC.
Given the attention on the Central Board of Central Bank, one was curious what does FSLRC say on the Board?
Part II of the report (page 16) looks at RBI Board. It said the Board should not have more than 12 members which is less than current prescription of 21 members:
8. (1) The Reserve Bank Board will consist of executive, non-executive and nominee members, to be appointed by the Central Government, where at all times – (a) the total number of members must not be more than twelve;
(b) the total number of executive members must not be greater than half of the total number of members; and
(c) up to two members will be nominee members.
(2) The executive members will include –
(a) the Reserve Bank Chairperson; and
(b) an administrative law member.
(3) The nominee members under sub-section (1)(c) will be nominated by the Central Government.
(4) The Reserve Bank Board will appoint a senior officer of the Reserve Bank to act as its secretary.
Eligibility of members of the Reserve Bank Board.
9. (1) Members of the Reserve Bank Board must be fit and proper persons, having expertise in dealing with matters relating to banking, payments and monetary 35 policy.
(2) A person cannot be appointed as a member on the Reserve Bank Board if such – (a) is an employee of the Central Government, except in case of the nominee members;
(b) is a member of Parliament or a state legislature;
(c) is a director, employee or officer of any banking service provider;
(d) is a director, employee or officer of any system provider;
(e) is a member of an advisory council of the Reserve Bank; or
(f) is a member of the Monetary Policy Committee, other than – 5 (i) the Reserve Bank Chairperson; or (ii) the executive member designated by the Reserve Bank Board to serve on the Monetary Policy Committee.
10. (1) The general superintendence, direction and management of the affairs and business of the Reserve Bank, other than the formulation of monetary policy, 10 will vest in the Reserve Bank Board, which may exercise all powers that may be exercised and do all acts that may be done by the Reserve Bank.
(2) The Reserve Bank Board must keep under constant review the performance of the Reserve Bank in giving effect to its objects, carrying out its functions and utilising its resources
Obviously, none of these details were even looked into by the experts and the press with entire attention on inflation target and MPC.
But now we can ask following questions:
- Why did FSLRC recommend lower number of members? What is the rationale?
- In the Board, the executive should not be more than half the members. Thus, at most there can be 6 executive and 6 non-executive members.
- Within executive we have one Chairperson and one executive law member. So 4 more can be selected.
- Then there are 2 government nominees on the Board which will be part of non-executive. So at most 4 members can be appointed as the non-executive members. This is 1/3rd of the current list of 16 members (10 from different fields +4 local board members+2 govt nominees).
- Is there no role for local board members at all? This is a worrisome suggestion as we should have looked at having more regional representation at MPC level itself.
All this makes the entire exercise so superficial really. We have not cared at all for the main body which would govern the central bank.
This is what happens when we just adopt a copy and paste approach. Instead of first looking at the history behind formation and governance of RBI and consider changes there, we have instead jumped into more minor matters of inflation target and power games in MPC (and implemented them as well!).
This is obviously to look like the advanced central banks as soon as possible. This is ironic that the limitations of these central banks have all but been exposed post the financial crisis. The inflation targets have become a joke and similar thinking of MPC members have not helped anyone. So what is the point really?
Further, does FSLRC give powers to RBI to withdraw notes?
Yes it does. Part II (page 143-44) says:
350. (1) The Reserve Bank will have the sole right to issue bank notes in India.
(2) Every bank note issued by the Reserve Bank will be legal tender at any place in India in payment or on account for the amount expressed on it, and will be 35 guaranteed by the Central Government.
(3) The Reserve Bank, after considering the recommendations of the Central Government, must notify –
(a) the denomination value of the bank notes to be issued by the Reserve Bank; and
(b) the form, design and material of the bank notes.
(4) The Central Government, on the recommendation of the Reserve Bank, may by notification, direct –
(a) the non-issue, or discontinuance of issue, of bank notes of certain denominational values; or
(b) that any series of bank notes of any denomination will cease to be legal tender in accordance with the conditions mentioned in the notification.
Hmm. Pretty similar to the language used in RBI Act whose section 26 (2) says:
(2) On recommendation of the Central Board the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender [save at such office or agency of the Bank and to such extent as may be specified in the notification].
(1) The Central Government may on the recommendation of the Reserve Bank currency. notify, –
(a) the non-issue or discontinuance of issue of bank notes of certain denominational values; or
(b) that any series of bank notes of any denomination will cease to be legal tender in accordance with the conditions notified.
(2) The notification must provide a deferred prospective date from which it takes effect.
(3) The notification must give reasonable time for persons to return such currency to any branch of the Reserve Bank.
(4) When the notification takes effect, all currency to which the notification applies will cease to be legal tender.
(5) Notwithstanding sub-section (4), the Reserve Bank will continue to be liable to pay currency issued by it.
This is more specific and talks about prospective date, reasonable time and so on. It also gave hints that what government was likely to do in future as well..