Transparency and governance in central banks
There is renewed debate about the working of the RBI board, after the demonetisation decision. In a recent article in the Indian Express, we linked the observed outcomes to the faulty institution that is the RBI board. The Public Accounts Committee (PAC) of Parliament has questioned the Governor about the role of the board. At a conceptual level, Parliament, controls the functioning of the executive and other statutory bodies through two steps:
- Making laws that govern the executive or statutory bodies (such as RBI, SEBI, etc.); and
- Reviewing, through the committee system, whether such bodies are acting in accordance with the law.
An institution, as an inanimate object, does not have a human personality; it cannot reflect on its actions and change its behaviour. Rather, an institution's DNA is the law that governs it. When this institution functions in an unexpected way, one must look at the legal structures governing it.
For example, in 2013, a series of unexpected corporate scams starting with Satyam rocked India. These created fresh urgency for Parliament to amend the Companies Act (1956) to address the issue. We did not stop at discussing whether Mr. Raju was a good person or a bad person; we went deeper and changed the Companies Act in ways that make such a crisis less likely.
RBI's Central Board controls the functioning of the body corporate, i.e. RBI itself. Hence, the sound functioning of RBI requires sound functioning of its board. The RBI Act (1934) determines the working of RBI's Central Board. Hence, we need to examine the RBI Act, and ask whether it features sound provisions for the working of the board.
In this article, we document how, when compared with similar laws in other jurisdictions, the RBI Act has many gaps in terms of transparency and accountability. Regulations are made by the Board to govern itself, which violates basic requirements of hygiene. The flaws in the RBI Act help us understand how the demonetisation event happened, and show the direction for reform.
RBI does not publish either the agenda or the minutes of any Central Board meeting. All that comes out is a press release. For a contrast, consider the Bank of England (BoE), which is grounded in the same legal tradition as India. It releases the minutes of every board meeting, 6 weeks after the meeting. This flows from the Financial Services Act of 2012 . These minutes go back historically, with minutes available for as far back as 1694. By this yardstick, RBI in 2017 lags the Bank of England of 1694.
Similarly in the U.S., the Federal Reserve Board (FRB) and numerous government entities are governed by a transparency law that is aptly called the Government in the Sunshine Act. This act lays down transparency and accountability measures that government regulatory bodies must comply with, covering both the way meetings of a regulator are conducted and how the regulator makes regulations. Board meetings are divided into two types of meetings, open meetings and closed meetings. For open meetings, subsection (a)(2) of the law mandates:
"every portion of every meeting of an agency shall be open to public observation."
Under this law, prior notice stating the meeting agenda must be given for every open meeting (Example). Accurate minutes or transcripts are published after each open and closed meeting (Example), and a live video is provided for open meetings. If board members knew that the nation was watching each word that they uttered, each would be more responsible.
To maintain confidentiality when required (such as in relation to commercially sensitive matters or pending investigations), some meetings are closed to the public. This provision can be easily abused to achieve opacity. Hence, the Government in the Sunshine Act explicitly specifies the following four procedural requirements before a meeting can be deemed secret:
- Ten clear criteria are provided under which a meeting may be closed. An item has to fall within this exhaustive list to justify closing a meeting. Public choice theory teaches us that the Agent, i.e. the agency, is biased in favour of opacity. Hence, this list of permitted exclusions should be controlled by the Principal, i.e. Parliament. The contents of this list cannot be modified either by the executive or the agency. As an example, the grounds for exemption under India's Right to Information Act are written into the law and cannot be modified by the executive (e.g. Ministry of Finance) or an agency (e.g. RBI).
- Public notice: Even when a meeting is closed, the agency must issue a public notice containg a suitably abridged agenda, and stating that it proposes to hold a secret meeting.
- Transcripts and minutes: The agency must maintain transcripts and minutes of closed meetings. Any agenda item discussed that does not meet the criteria closing the meeting is made available to the public. The rest of the proceedings are kept in order to be released once the reasons for confidentiality cease to exist.
- For parts of a meeting to be closed and minutes withheld, the majority of the entire membership of the agency (not just those present and voting) must vote in favour of each agenda item or portion of the meeting to be closed.
The working of RBI, which is coded in the RBI Act, 1934, is inconsistent with contemporary thinking in Indian public administration. As an example, six years ago, the Chief Information Commissioner ordered RBI to disclose minutes of the board meeting. Oddly, this instruction appears to have been ignored.
Quality of minutes
The purpose of maintaining public records of meeting discussions is to demonstrate that the persons appointed to positions of responsibility and power are discharging their duties with care and diligence. The most recent press release only records attendance, and provides a two line summary which reads:
The Board reviewed the current economic situation, global and domestic challenges and other specific areas of operations of the Reserve Bank of India.
Let us compare this against the equivalent institution, the Court of Directors of the Bank of England. They publish detailed minutes of each meeting. These minutes record attendance and, excluding confidential elements, report in detail the views of each member on various issues such as risk profile; supervision functioning; monetary policy report; financial stability report, etc.
Similarly, while minutes of a single meeting of the New York Federal Reserve Board are around 6000 words, and those of the BoE Court of Directors are around 2100 words, RBI's press release is 142 words long. This either shows that the Central Board does not deliberate, or that the deliberations are not being released.
Most Central Banks have created committees based on modern principles of governance. For example the Bank of England has the following committees written into the general regulations of the Bank of England:
- Audit and Risk
- Nominations Committee for promotions within the Bank
- Remuneration Committee for fixing pay
- Transaction Committee for large value transactions which are not in the ordinary course of business
- Sealing Committee to governing the affixing of official seal on Bank documents
These are in addition to committees mandated by law, such as the Monetary Policy Committee and the Financial Stability Committee. Similarly, the Federal Reserve Board, has created sub-committees to conduct specific functions:
- Committee on Board Affairs
- Committee on Consumer and Community Affairs
- Committee on Economic and Financial Monitoring and Research
- Committee on Financial Stability
- Committee on Federal Reserve Bank Affairs
- Committee on Bank Supervision
- Subcommittee on Smaller Regional and Community Banking
- Committee on Payments, Clearing, and Settlement
Each of these committees has specific terms of reference specifying their authority and duties. In contrast, apart from statutory committees, RBI's general regulations create one Committee of the Central Board. There is no risk committee; audit committee; remuneration committee, etc. Regulation 15 of RBI's General Regulations gives wide and sweeping powers to the Committee of the Central Board:
The Committee of the Central Board shall have full powers to transact all the usual business of the Bank except in such matters as are specifically reserved by the Act to the Central Government or the Central Board.
There is no provision for board committees with identified duties. The composition of the Committee is quite unusual. Regulation 10(i) if the General Regulations states:
A committee which shall be called the Committee of the Central Board, consisting of the members of the Central Board who may at the time be present in the area in which the meeting is held,
The quorum for the Committee of the Central Board is quite unusual. Regulation 10(ii) states:
Two directors of whom one shall be a director nominated under section 8(1)(b) or 8(1)(c) or 12(4) of the Act shall form a quorum for the transaction of business.
RBI has a sanctioned strength of 21 directors. However, only 10 are currently appointed. But, since the Committee of the Central Board can take most of the decisions with just two directors, the debate about the size and vacancies on the Board becomes moot. This committee can carry out all tasks, except those specifically allocated to the Central Board.
The RBI budget seems to suggest poor oversight. There is no evidence that the Central Board actually discusses the budget. While the RBI budget for 2014-15 was Rs.13,356 crore, evidence that the Central Board looked at expenditure items is lacking; a large budget was approved without any observation. In contrast, BoE releases detailed comments on its financial dealings. Discussing the draft annual report for 2013, the released minutes of the Court of Directors notes:
Mr Jones noted that the Accounts were likely to show an onerous lease provision of £24mn, reflecting the Bank's assumption of the unused space at Canary Wharf formerly occupied by the FSA, unless tenants could be found. Negotiations with several possible tenants were in train.
The Central Bank of Canada, among other disclosures, also provides a list of all contracts above CAD 100,000 every quarter. For example, in the 3rd quarter of 2016, Bank of Canada paid Diebold Company of Canada, a manufacturer of ATMs and security systems CAD 150,000.
Under the rule of law, agencies and persons should be judged against set principles of law. However, in India, Parliament has set very low standards of transparency and accountability in the RBI Act (1934). Parliamentary committees with the power to hold government agencies accountable is a healthy feature of democracy. However, with the present silences in the RBI Act, the current approach where the Legislature questions RBI's functioning is yielding inadequate outcomes.
The correct approach for the legislature is to first formulate a law mandating transparency and accountability, from the Central Board and the organisation. The draft Indian Financial Code addresses most of the current concerns. After that, Parliament it must conduct regular oversight meetings (through the parliamentary committees) to hold the agency accountable against the mandated standards.
Ila Patnaik and Shubho Roy are researchers at the National Institute of Public Finance and Policy, New Delhi. The authors thank Nelson Chaudhuri, and Sanhita Sapatnekar of NIPFP for their inputs.