The Union government’s decision to turn down the Reserve Bank of India’s (RBI’s) demand to remove its nominees on the boards of public sector banks (PSBs) is unfortunate. RBI
Governor Urjit Patel
has been repeatedly asking the finance ministry
to allow the central bank to distance itself from the boards to avoid a clear conflict of interest. This is not a new demand. Even Mr Patel’s predecessor, Raghuram Rajan, asked for a similar shift during his stint. In August 2016, Mr Rajan wrote to the government arguing that the “RBI
would perform a purely regulatory role, and withdraw its representatives on bank boards”. Indeed, the demand for this dates back even earlier.
Way back in the 1990s, the Narasimham committee on banking sector reforms had recommended that the RBI
should give up its seats on the boards of banks. In fact, in 2006, the government of the day amended the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, to remove the provision which necessitated the appointment of an RBI official on the boards of PSBs. However, this amendment still required the RBI to send recommendations to the government to appoint a nominee with “expertise and experience in matters related to regulation or supervision of commercial banks”. Then, in 2014, the P J Nayak committee, which evaluated the governance of bank boards in the country, argued in favour of withdrawal of RBI nominees from PSB boards. The only difference was that the Nayak committee favoured a phased shift, driven by an increase in the capacity of bank boards to take decisions.
The timing of the government’s decision is crucial since India’s PSBs have, over the past few years, accumulated massive non-performing assets. As the quarters have rolled by, the profits of PSBs have nosedived because of the RBI’s insistence on more transparent recognition and provisioning of non-performing assets (NPAs). While much of the heat has been on the way banks have gone about taking their lending decisions, the RBI, too, has been criticised increasingly for failing to supervise the PSBs. But, as both Mr Patel and Mr Rajan said in the recent past, the RBI feels handicapped by regulation. After all, how can it be part of both the decision-making process as well as supervision? This is exactly what Mr Patel told a parliamentary panel in June when he was questioned on the rising mountain of NPAs in the banking system.