India needs to strengthen the Reserve Bank's independence so as to help it pro-actively supervise banks and deal with issues like removal of government-appointed directors on bank boards, according to an International Monetary Fund report.
The report suggested that loan classification and provisioning rules should be reviewed to ensure they reflect observed losses, and to reduce special loan categories. "Other priorities include introducing a risk-based solvency regime for insurers, unifying the oversight of commodities markets and addressing risks from politically exposed persons and the gold sector," it said.
The IMF made these observations in its Financial System Stability Assessment for India. The FSAP took stock of the considerable progress made in strengthening financial sector oversight and identified areas where a scope for further improvement remains.
"Notably, these include strengthening the RBI's de jure independence as well as its powers over the PSBs (Public Sector Banks)...," the multilateral institution said.
The current gaps in the RBI's supervisory powers over the public sector banks (i.e. the RBI cannot remove government-appointed public sector bank directors or management, force a merger, revoke a license, or trigger liquidation of PSBs), as well as extensive powers of the government to override RBI decisions should be addressed through legal amendments.
IMF Financial System Stability Assessment
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