Budget: FM, Rajan in tune on policy

While the finance minister has backed the Reserve Bank of India’s proposals for revamping the monetary policy framework and opening new banks, the move to go ahead with recommendations of the Financial Sector Legislative Reform Commission might be a bone of contention between the government and RBI.

“It is also essential to have a modern monetary policy framework to meet the challenge of an increasingly-complex economy.

“The government will, in close consultation with the RBI, put in place such a framework,” said Finance Minister Arun Jaitley while presenting the Union Budget for 2014-15.

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RBI governor Raghuram Rajan had set up a committee to review the monetary policy framework.

The panel had suggested a five-member monetary policy committee headed by the RBI governor be accountable for controlling inflation.

The government also said norms of ‘on-tap bank licences’, as well as for niche banks, will be announced during the course of the year -- an initiative RBI is perusing actively.

“After making suitable changes to current framework, a structure will be put in place for continuous authorisation of universal banks in the private sector in the current financial year.

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“RBI will create a framework for licensing small banks and other differentiated banks,” said Jaitley.

The central bank has proposed to move away from the present system of occasionally awarding bank licences, to make it a continuous process.

In addition, allowing entities for niche banking services for specific activities, like payments or investment banking, has also been contemplated.

“Differentiated banks serving niche interests, local area banks, payment banks, etc are contemplated to meet credit and remittance needs of small businesses, unorganised sector, low income households, farmers and migrant work force,” Jaitley noted.

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On the other initiative of RBI regarding governance issues in public sector banks, the finance ministry has agreed with the P J Nayak committee proposal to give more autonomy to the lenders but said the government will continue to have majority stake.

The committee had suggested the government give up its control from these banks and reduce stake below five per cent.

The other area, which the government is planning to go ahead, despite RBI’s reservation, is the recommendations of FSLRC.

“It is essential to strengthen and modernise the legislative regulatory framework.

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“There are some important recommendations of the Financial Sector Legislative Reforms Commission like the enactment of the Indian Financial Code, which is considered necessary for better governance and accountability.

 “It will be my endeavour to complete the ongoing process of consultations with all the stakeholders expeditiously on this,” said Jaitley.

Some of the Commission’s recommendations, however, came under severe criticism from Rajan.

In a recent speech, he described the idea of a unified regulator as ‘somewhat schizophrenic’ and went on to say the report was inconsistent.