Financial stability and Development Council (FSDC)

Financial stability and Development Council (FSDC) is a super regulatory body constituted for regulating the financial sector of India which is essential for creating a healthy and efficient financial system in the economy of India. FSDC is an apex level body constituted by the government of India in 2010. The idea for the creation of a super regulatory body for the financial sector was first mooted by the Raghuram Rajan committee on financial sector reforms in 2008.

In December 2010, the Government of India established the Financial Stability and Development Council with the then Finance Minister Dr Pranab Mukherjee as its chairman. FSDC is an autonomous body that deals with macroprudential and financial regularities in the entire financial sector of the economy of the country. The apex-level super regulatory body, FSDC is not a statutory body and no separate funds have been allocated for the council to undertake its activities.

The global financial crisis of 2008 put pressure on the Institutions and governments across the world for prudential regulation of their economic assets. FSDC is seen as India's efforts to be in a better condition for the prevention of such incidents in future in India. FSDC aims to strengthen and institutionalize the mechanism for maintaining financial sector development, inter regulatory coordination, financial stability and monitoring of the macro-prudential regulation of the Indian economy.

Need for FSDC

  • Regulation of the financial sector is necessary for a healthy and efficient Financial system in the economy. Different regulators regulate different financial sectors such as RBI for commercial banks and non banking financial companies, SEBI for capital markets, IRDA for Insurance sector etc.
  • For ensuring better efficiency and for avoiding the overlapping of functions, there is a need for coordination among these financial regulators.
  • To achieve this purpose, the Government of India formed the Financial Stability and Development Council in 2010. The tussle between SEBI and IRDA over the regulation of Unit Linked Insurance Plan (ULIP) provided the immediate impulse for establishing the FSDC.
  • The Council coordinates financial and economic regulations through discussions and consultations among these regulatory organisations.

Background and history

  • The Financial Stability and Development Council has replaced the High Level Coordination Committee on Financial Markets (HLCCFM) which had the responsibility to informally facilitate the regulatory coordination among the different financial regulators.
  • HLCCFM was an informal body which has its own limitations. Due to the absence of formal instruments, clear functions and powers, and empowered secretaries to follow up the decisions of the HLCCFM its effectiveness was limited. Due to the lack of integrated and holistic view among regulators, the outcomes of HLCCFM was suboptimal.
  • The Raghuram Rajan committee had suggested for the creation of a statutory body called Financial Sector Oversight Agency for macro prudential supervision of the economy and for monitoring the large and systemically important financial conglomerates and for the diffusion of inter-regulatory conflicts.
  • On 12th October 2010, the central finance minister held a meeting with the regulators and the officials of the ministry of finance for discussing the creation of the Financial Stability and Development Council.
  • An agreement was reached for strengthening and institutionalizing the mechanism for ensuring financial stability and development. The government of India notified the FSDC on 30th December 2010.

Composition of the Financial Stability and Development Council

Initially, the members of FSDC were the heads of Reserve Bank of India RBI, securities exchange Board of India SEBI, Insurance Regulatory Development Authority IRDA, and Pension Fund Regulatory and Development Authority PFRDA along with the central finance minister as its chairman. The Finance Secretary and/or Secretary, Department of Economic Affairs (Central Finance ministry), Secretary, Department of Financial Services, and Chief Economic Adviser were also the members of FSDC. The Council was authorised to invite experts to its meetings if deemed necessary.

In May 2018, the Government of India reconstituted the FSDC to include new members. The members of FSDC after reconstitution are:

  • Chairperson: The Union Finance Minister of India
  • Governor Reserve Bank of India (RBl),
  • Chairman, Securities and Exchange Board of India (SEBI),
  • Chairman, Insurance Regulatory and Development Authority (IRDA),
  • Chairman, Pension Fund Regulatory and Development Authority (PFRDA),
  • Minister of state responsible for the Department of Economic Affairs (DEA),
  • Secretary of Department of Electronics and Information Technology’,
  • Secretary, Ministry of Corporate Affairs,
  • Revenue secretary,
  • Finance Secretary and/or Secretary, Department of Economic Affairs;
  • Secretary, Department of Financial Services;
  • Chief Economic Adviser and
  • The Chairperson of the Insolvency & Bankruptcy Board of India (IBBI).
  • The Chairperson can invite any expert if deemed necessary in its meetings.

Functions of the Financial Stability and Development Council

  • FSDC has the responsibility to address and improve inter-regulatory coordination and promote financial sector development in India.
  • FSDC will act as an apex level forum for strengthening and institutionalizing the mechanism for the maintenance of financial stability in the country.
  • The council will focus on financial inclusion and financial literacy.
  • The council will monitor the macro-prudential supervision of the Indian economy.
  • It has the responsibility to assess the functioning of the large financial conglomerates.
  • FSDC coordinates India's international interface with financial sector bodies such as Financial Action Task Force (FATF), Financial Stability Board (FSB) etc.

FSDC Sub-committee chaired by the RBI Governor

  • The sub-committee chaired by the governor of RBI is an important wing of the council in terms of functional responsibility. The sub committee replaces the existing High Level Coordination Committee on Financial Markets.
  • The subcommittee meets more often than the full council. All the members of the Financial Stability  Development Council are also the members of sub-committee. Apart from these, the sub committee also has other members that include four Deputy Governors of RBI, and the Additional Secretary, DEA, incharge of FSDC.

Other wings within the Financial Stability Development Council

Several other wings have been created within the financial stability and Development Council for specific purposes.

  • Inter-regulatory technical group.
  • Inter-regulatory forum for monitoring financial Conglomerates (IRF-FC).
  • Technical group on financial inclusion and financial literacy.
  • Early warning group.
  • Working group on resolution regime for Financial Institutions.
  • Macro Financial and monitoring group.

19th meeting of financial stability and Development Council

The Nineteenth Meeting of the Financial Stability and Development Council (FSDC) was held in New Delhi under the Chairmanship of the Union Minister of Finance and Corporate Affairs, Shri Arun Jaitley. The members who attended the meeting include the then RBI Governor Dr Urjit R. Patel, IRDA chairman, SEBI chairman, PFRDA chairman and other heads of financial sector regulators along with the heads and senior officers of the central government.

Key points of the 19th meeting

 

  • Economic review: The council reviewed the health of both the domestic and global economy, attributed the performance of the financial sector and discussed the issues arising due to rising oil prices. The council discussed issues related to real interest rate, current liquidity situation, and the liquidity position in non-banking financial companies and mutual fund space. The council decided that the regulators and the government would keep a watch on the situation and would take vital measures.
  • Cyber security in the financial sector: The council reviewed the development related to the strengthening of cyber security in the financial sector and the progress made towards the setting up of the Computer Emergency Response Team in Financial Sector (CERT-Fin) under statutory framework. The council discussed the need for the identification and securing of the critical information infrastructure in the financial sector.
  • Cryptocurrency: The council discussed the issues and challenges related to Crypto currency and Crypto assets. The Council was brief about the deliberations in the high level committee chaired by the Secretary (Economic Affairs) for devising a proper legal framework for banning the use of private cryptocurrencies in India and promoting the use of Distributed Ledger Technology (blockchain technology) as per the announcements of the 2018-19 budget.                                          
  • The other issues discussed in the Council include market development and financial impacts of the use of SupTech and RegTech by financial firms and the regulatory and supervisory authorities. The council also discussed the implementation of the recommendations of Sumit Bose Committee report on measures that include promotion of suitable disclosure regime for financial distribution costs.

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