Letter to BS: Banking regulatory powers should be ownership neutral

Reserve Bank of India
The Reserve Bank of India (RBI) has spoken about the need for ownership-neutral regulation and supervision of banks. The central bank has said that it has no legal powers to appoint or remove the CMDs/MDs of public sector banks (PSBs), remove ineffective members of the PSB boards, merge PSBs etc. It has these powers in case of private banks. Earlier, the Financial Sector Assessment Programme carried out by the International Monetary Fund and the World Bank on the Indian financial sector (its report came out in December 2017) also mentioned this anomaly. Now, the Banking Board Bureau chairman has said the same thing and also mentioned that the body has recommended a slew of banking reforms awaiting the approval of the finance ministry. He mentioned that he has not been able to even meet the finance minister in this connection since July 2017. These legal reforms should not be delayed any further.

The RBI should be legally able to approve the appointments of/secure the removal of both MDs and board members of PSBs. Not only should the RBI be able to regulate and supervise PSBs like private banks, but also the conflict of interest resulting from officers of the regulator and supervisor (RBI) serving on the boards of the PSBs (including the big loan sanctioning committees of the board) should be urgently remedied by withdrawing the officers from these positions.

The RBI supervisors are placed in a difficult situation when they have to point out infirmities in sanction and/or follow-up of loans when its officers are serving on the boards/committees of the PSBs that have sanctioned these loans. The government, as the owner of PSBs and in the interests of better corporate governance, should appoint its officers/professionals to serve on the loan sanctioning committees of the PSB boards. It cannot exercise control over the PSBs without accepting its responsibility/accountability as the owner of these banks. The RBI should be given appropriate powers vis-à-vis PSBs and then be held accountable for timely and correct exercise of those powers.

The Editor, Business Standard

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