The Reserve Bank must tender accountability in order to claim and enjoy autonomy from the government. Scale notwithstanding, lobbying, as a strategy, is also debatable

Accountability and ethics are very crucial to the survival of the financial sector and there is no doubt that there has been a systemic breakdown in the accountability and ethics globally across the financial sector in the last few years, leading to various forms of economic crisis, the effects of which we are still experiencing today! As all of you would agree, the integrity and credibility of financial markets and peoples’ trust in these markets is of paramount importance to the economic health of countries and India is no exception to this basic dictum. And therefore, without any doubt, the stability, soundness, safety and sustained prosperity of India’s financial system and larger economy rely fundamentally on the notions of fairness, transparency and accountability.

That said, while businesses and individuals in the financial sector have every right to pursue profits, at the same time they also have an intrinsic duty to produce services of high quality and need to conduct themselves fairly and with a high degree of transparency and accountability. However, this change can happen in real time only if the central bank (the Reserve Bank of India-RBI), which is the primary regulator of the financial sector, starts to facilitate this process of metamorphosis, which is required NOW, more than ever before! In other words, unless the RBI becomes the change that it wants to see on the ground in the financial sector, I am afraid that there will be very little action on the ground in terms of accountability!

So, what needs to be done to help move the RBI to a more accountable entity, from a long term perspective? We discuss this briefly in this final article in the series on RBI’s accountability!

First, there is the issue of legal accountability. Like in many other countries (USA and elsewhere), this would require the governor of the RBI to depose on a quarterly or semi-annual basis before a select committee of Hon Parliament such as the Hon Parliamentary Standing Committee on Finance (PSCF). Ideally, this deposition should follow the policy pronouncements made by the RBI. Being an unelected individual with such huge powers, the RBI governor must clearly be subject to Parliamentary Accountability, apart from the existing mechanisms. This would also mean to suggest that the RBI governor should therefore, be appointed by a Parliamentary committee and also be capable of being removed by them, if the situation so demands!

And, as noted in the media, Dr Duvvuri Subbarao, former governor of RBI, has argued for the same and I quote him,

“The Reserve Bank must tender accountability in order to claim and enjoy autonomy from the government ... We must be conscious to the fact that we are unelected officials. And our mandate is that the government has appointed us. In order to claim, demand autonomy from the government, and to enjoy that autonomy, we must remember that we must tender accountability ... Reserve Bank must take its accountability seriously if it wants to be knowledge institution. ...The governor should go before a select committee of the Parliament  ... Just like it happens in US, UK, where the governor goes and gives evidence before the committee. In India too, the governor must go and tender accountability to members of Parliament select committee. That will be a good practice,"ⁱ

Second, while Parliamentary accountability is crucial, it cannot however be a substitute for basic accountability of the RBI to the non-executive members of the RBI board—especially, from an operational perspective. Here, I would like to humbly state that, these board members must become serious and active players in the immediate accountability of the RBI and the governor—that is why they are in the RBI board in the first place.

Let us face it! The RBI is a great example of a central bank that has, by and large, individual centric decision making. Whether it is monetary policy or any other function, the governor unquestionably reigns supreme.  An added factor makes the respected governor omnipresent and omnipotent at the RBI—the high level of discretion currently available to himⁱⁱ (which I am not questioning here).

Given the above, my overall point is simple: subject the presently available huge discretionary decision making powers with the RBI governor to normal checks and balances (of good governance) so as to facilitate greater accountability in decision making! Put differently, make the governor answerable to the non-executive members of the board of the RBI. In fact, at this basic level, the non-executive members of the RBI board must make the governor and RBI accountable for the use of the countries’ (scarce) resources, performance of regulatory and supervisory functions and the consequences of their actions.

Thus, as at Bank of New Zealand, what is needed is a framework of accountable autonomy where the governor (along with his team) are the primary decision-makers at the central bank and the Board exclusively engages in a monitoring role, evaluating the performance of the central bank and governor.

Third, facilitate the transition from being an individual centric decision maker (that most RBI governor’s have tended to be) to one who uses the collection potential and wisdom of RBI’s deputy governor’s, executive directors and others. This model of central banking is certainly not without merits and must be tried before it is dismissed. More importantly, this would certainly call for the creation of an empowered monetary policy committee along with voting rights—an advisory committee would not do here as it fixes no responsibility at all. Of course, this would also require that clear mandates and objectives exist (for the RBI) along with inflation and other targets. To reiterate, there is considerable evidence globally from the experience of central banks to show that group based collective decision making has led to better results and actions on the ground for the economy as compared to highly individualistic decision making that most of  our RBI governor’s have tended to engage in!ⁱⁱⁱ

Fourth, the RBI must not only be audited by independent external auditors but more importantly, it should also be subject to audit by the CAG (The Comptroller and Auditor General). Look at the example of Bundesbank (Germany), which is a much cited example of a central bank in Europe. It has been subject to both independent external audits as well as oversight by the supreme audit authority (federal court of auditors). I fail to understand the logic that the RBI is different and therefore needs no CAG oversight. In fact, Parliamentary (and legal) accountability will be enhanced significantly, if and only if the RBI is subject to a CAG audit!

Last but not the least, there is so much lobbying that happens by firms and individuals in the financial services industry, and especially with the regulator. The RBI must be more transparent on such lobbying. Without any doubt, the right to voice our concerns and interests, and thereby attempt to influence public policy, is fundamental to any democracy like India. Many stakeholders including individuals, businesses, industry associations, advocacy organisations and other stakeholders have this fundamental right. However, lobbying is, indeed facing a crisis of legitimacy (e.g., the Radia tapes have revealed a lot). It is also very big business, especially for those representing these companies and (sometimes, even) foreign countries. Even the normally passionate civil society lobbying, has started to acquire significant commercial dimensions, often galvanising support for an extraordinary range of objectives. Without any doubt, the sheer numbers of lobbyists and the huge resources at their command perhaps, even threaten to overwhelm and/or co-opt public (minded) officials and the RBI is no exception to this trend—in fact, there was said to be significant lobbying by industry associations and others before, during and after the 2010 AP micro-finance crisis.

Another issue is relevant here. Scale notwithstanding, lobbying, as a strategy, is also debatable for several reasons. Many a time, sadly, the spirit of law is not observed. Further, sometimes undue influence falls into too few hands, or into the hands of those with very narrow commercial interests—I have pointed out in the earlier articles the present case where a single person holds seven (I had thought just six) very high profile positions related to the RBI. And of course, not to sound like a broken record, there are conflicts of interests in the recent financial inclusion and banking selection advisory committees appointed by the RBI.

All of the above in short, show that there is an accountability deficit, especially concerning lobbying with the financial sector regulator. Concrete action is therefore needed to make such lobbying more transparent and accountable and here again the buck stops with the RBI in the financial sector and it must show a clear actionable way forward—so that it is not only becomes accountable but is also perceived to be accountable, by the people at large!