Stating that there are strong inter-linkages between banks, NBFCs and other deposit-taking entities, he said that if monetary policy needs to be effective and financial markets aim to remain stable, they should be regulated by the central bank.

"A unified regulation by the same regulator (RBI) is essential for financial stability as there are strong inter-linkages between banks and deposit-taking non-banking financial companies. (Moreover), for monetary policy to be effective, credit creation by banks and credit institutions like NBFCs should be regulated by the central bank," the outgoing RBI Governor told the FIBAC, the two-day annual banking summit organized by the industry body Ficci in Mumbai.

Explaining the reasons for his reservations against the move and why the RBI should regulate both banks, non-banking entities and all other deposit-taking bodies, Subbarao said, "One of the major causes for the 2008 financial crisis was that credit intermediation activities were conducted by non-banks or the so-called shadow banks, which were primarily outside the regulatory purview.”

"This raised serious concerns of regulatory arbitrage, requirements for similar regulation of entities performing similar activities and issues of commonality of risks and synergies of unified regulation for such entities," Subbarao, who completes his five-year term on September 4, said.

He further said that the country is going against the global trend wherein after the 2008 crisis, most of the leading governments have been entrusting more, and not less regulatory powers to the central banks.

Following the 2008 global credit crisis, the government constituted the Financial Sector Legislative Reforms Commission (FSLRC) ‘with a view to rewrite and cleaning up the financial sector laws and to bring them in tune with the current requirements,’ and the commission chairman retired justice BN Srikrishan had submitted report in March 2013.

(Agencies)

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