The Reserve Bank of India is establishing a cloud facility for the financial sector. But why does the central bank need to involve itself in ‘providing’ a service that banks can buy from the private sector?
The proposal needs to provide details on the rationale behind this move. Instead of transitioning public sector banks away from government ownership, we are moving towards including non-bank services into the production function of government. This does not bode well for either competition or effective regulation.
The lack of a rationale
Governments often engage in producing goods and services that the private sector is unable or unwilling to provide, usually because it is not cost-efficient to do so. This, however, does not apply in the case of a cloud facility.
The RBI press release states that banks and financial entities are “maintaining an ever-increasing volume of data” and that many of them are “utilising various public and private cloud facilities for this purpose”.
It then notes that the “proposed facility would enhance the security, integrity and privacy of financial sector data. It is also expected to facilitate scalability and business continuity.”
If the RBI recognises that public and private service providers are already in the market, why does it feel the need to compete with them? The facilities of the existing service providers may not meet the security, integrity, and privacy standards desired by the RBI. However, what would be the comparative advantage of an entity set up by the central bank over the market players today? There is no evidence to suggest that the building of a cloud facility is in and of itself a guarantee of additional security or privacy.
A decision as big as starting a new business line despite existing alternate service providers should come after a detailed explanation of why it makes sense, what this step hopes to achieve, and how it justifies the expenditure of public money.
The press release does not provide any such detail.
State ownership of production
In India, we have a history of either the government producing goods and services or heavily licensing private sector production. This led to decades of inefficiency as the system could not respond with agility to changing market dynamics. Government processes leave little incentive for the management to innovate to gain market share. As a result, we shifted from such a centrally planned economy to a market-based economy in the 1990s.
But decisions such as the RBI setting up a cloud facility raises questions about whether we have come very far from the world of service production and provision by the government.
The RBI says its cloud facility will be set up and initially operated by the Indian Financial Technology & Allied Services (IFTAS), a wholly-owned subsidiary of the central bank. Eventually, the cloud facility will be transferred to a separate entity owned by financial sector participants.
IFTAS, a Section 8 company, already seems to have a cloud computing ecosystem for banks. However, is it the skill-set of a central bank (or its subsidiary) to compete effectively with market players with much more experience in providing cloud services? Each such choice by the bank will remove its focus from its core function—ensuring price stability.
As the owner of IFTAS, the RBI will have to channel its energies into overseeing the governance and administration of this entity. This may not be the core competence of a central bank.
The rationale for transferring the facility is also unclear, especially because the proposal envisages the eventual creation of a new entity that will be owned by financial sector participants. If the choice of ‘financial sector participants’ is restricted to banks, then the new entity will again primarily be public sector-dominated because most banks in India continue to be government-owned. Further, financial sector participants may also find it in their interest to “buy” services from a separate firm, instead of “owing” the entity that provides the service.
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Implications for regulation
More important than the competence of a regulator-owned subsidiary is the question of conflict of interest. For example, the regulator could potentially either mandate or gently nudge banks to only transact with its favoured service provider. It could devise policies that are advantageous to the “national champion” at the cost of other private sector players. This is detrimental to the industry, and to the potential for innovation, as firms may not be incentivised to invest in such a market, beyond a bare minimum.
Sometimes, the existence of a government-owned entity biases the regulator in either designing or enforcing regulations in favour of the state entity. Several sectors in India, with a large state-owned player, have seen instances of such behaviour playing out— such as in the electricity sector where the regulator often rules in favour of the state-owned distribution utility. This undermines the credibility of the institution in the long run.
Renuka Sane is research director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. She tweets @resanering. Views are personal.
(Edited by Asavari Singh)