Financial Stability and Development Council (FSDC)

The Financial Stability and Development Council (FSDC) is India's top forum where the government and all financial regulators sit together to protect the stability of the financial system. It is chaired by the Union Finance Minister. It was set up by the Central Government in December 2010. It is not created by any law, so it is a non-statutory body.

Why does it exist?

India has different regulators for different parts of the financial system: the RBI for banks, SEBI for stock markets, IRDAI for insurance, PFRDA for pensions. Each looks after its own area. But a crisis rarely stays in one area. For example, if a big NBFC fails, banks that lent to it, mutual funds that bought its bonds and insurers that invested in it are all hurt. Someone must look at the full picture and make the regulators work together. That is the FSDC's job.

Where did it come from?

After the 2008 global financial crisis, many countries created councils to watch system-wide risks. In India, the Raghuram Rajan Committee on Financial Sector Reforms (2008) had suggested such a body. The Union Budget 2010-11 announced it, and it was set up in December 2010. It replaced the earlier High Level Coordination Committee on Financial Markets (HLCCFM).

Who is in it?

• Chair: Union Finance Minister.
• Regulators: Governor of the RBI; chairpersons of SEBI, IRDAI, PFRDA, IBBI (Insolvency and Bankruptcy Board of India) and IFSCA (International Financial Services Centres Authority).
• Government: Finance Secretary and/or Secretary of the Department of Economic Affairs, Secretary of the Department of Financial Services, Secretary of the Department of Revenue, Secretary of the Ministry of Corporate Affairs, Secretary of the Ministry of Electronics and Information Technology (MeitY), and the Chief Economic Adviser.

The Council was reconstituted in 2018 to add the Revenue and MeitY secretaries, reflecting the growing role of tax and technology in finance.

How does it work?

• The full Council meets a few times a year under the Finance Minister.
• The FSDC Sub-Committee is chaired by the RBI Governor. It does the day-to-day work of watching risks. Its shared view is published in the RBI's Financial Stability Report, twice a year.
• The FSDC does not replace any regulator. Each regulator keeps its own powers. The FSDC is a place for coordination, sharing data and planning responses.

What does it do?

Its main areas are:

• Financial stability: Watching system-wide risks, including large financial conglomerates (groups that run banks, insurance and other financial businesses together).
• Inter-regulatory coordination: Settling overlaps and gaps between regulators.
• Financial sector development: Deepening markets and improving the system.
• Financial literacy and financial inclusion: Helping more people understand and use formal financial services.

Commonly confused concepts

• FSDC vs RBI: The RBI is a statutory regulator (created by the RBI Act, 1934) with legal powers over banks. The FSDC is a non-statutory coordination forum; it has no power to issue binding orders to banks.
• FSDC vs FSDC Sub-Committee: The Council is chaired by the Finance Minister; the Sub-Committee is chaired by the RBI Governor.
• FSDC vs Financial Stability Board (FSB): The FSB is an international body, set up in 2009 after the crisis, based in Basel, that coordinates financial rules among G20 countries. India is a member. The FSDC is India's domestic body.

Issues, criticism and the way forward

• Regulator independence: Some experts worry that a Council chaired by the Finance Minister could reduce the independence of the RBI and other regulators. Others say government presence is needed because the government finally bears the cost of a crisis.
• No legal backing: Since the FSDC is not created by law, its decisions are not binding. The Financial Sector Legislative Reforms Commission (FSLRC), chaired by Justice B.N. Srikrishna, recommended in its March 2013 report (with a draft Indian Financial Code) that the FSDC be made a statutory body leading on systemic risk. This has not been done.
• New risks: Fintech, crypto assets, cyber risks and climate risks cross the boundaries of many regulators, making coordination even more important.
• Way forward: Better data sharing among regulators, clear crisis-management plans, and regular joint stress tests.

Concepts to Know

• Statutory body: A body created by a law passed by Parliament.
• Non-statutory body: A body created by a government decision (executive order), not by a law.
• IBBI: The regulator for the insolvency process under the IBC, 2016.
• IFSCA: The single regulator for financial services in International Financial Services Centres, like GIFT City in Gujarat.
• Financial inclusion: Making sure that every person, including the poor, has access to basic financial services like a bank account, credit and insurance.