In my piece two weeks ago, I went into each of the legal provisions which, according to the Reserve Bank
of India (RBI) governor, supposedly prevented the RBI
from acting against public sector banks
(PSBs), and showed how those sections did not discriminate between PSBs and private banks.
In this piece, I look at what the real powers of the RBI
are. For starters, let me refer to the RBI’s own document Report of the Working Group on Resolution Regime for Financial Institutions
of May 2014. In chapter 3, the RBI
report states, “RBI
is vested with the power to give directions to banks (banking companies and public sector banks
) in public interest as also to prevent the affairs of a bank
from being conducted in a manner detrimental to the interests of its depositors or prejudicial to its own interests. RBI
may caution or prohibit banks
from entering into any particular transaction
What could be more black and white than this about the RBI’s powers?
Second, let me turn to a new book Reforming the Indian Public Sector Banks
by TR Bhat, who led the Corporation Bank
Officers’ Organisation, a proactive and responsible union, which has blown the whistle on many malpractices by the senior management of the Corporation Bank.
Mr Bhat, with 33 years’ experience as a banker, points out that the RBI
has at least four kinds of supervisory powers in dealing with PSBs on a regular basis.
ALSO READ: RBI's powers over PSBs: What's the truth? - I
It has a nominee on the bank’s board. Depending on the size of the bank, the status of the RBI
nominee would vary. During the Harshad Mehta scam, RBI
Deputy Governor R Janakiraman was on the State Bank
of India board. The board is the nerve centre of all major decisions, which the RBI
is a privy to. The RBI
regularly inspects the books of the PSBs. If needed, it can conduct a special audit. The inspection reports are discussed with the senior executives of the bank
and the Audit Committee of the Board (ACB).
can bring in an institutional mechanism to monitor the working of banks, give policy directions to them collectively, and can advise them individually. For example, in 1994, points out Mr Bhat, the RBI
set up the Board for Financial Supervision
(BFS) to supervise banks, financial institutions, and non-banking financial companies. In 2002-03, the RBI
deployed the system of Macro-Prudential Indicators (MPIs) for studying macro data and suggesting a course of action.
The introduction of Prompt Corrective Action to identify signs of weakness and take pre-emptive action was also a part of the same piece. One more example: The RBI
has repeatedly spelt out the different modes of debt restructuring, the major impact of which is on PSBs. According to Mr Bhat, “RBI
has regularly invoked this power to guide the banks on operational issues like risk management, asset liability management, corporate governance and control over frauds. Banks were required to heed the advice of RBI”. Finally, the RBI’s supervisory powers over banks extend “through a complex set of periodic returns and statements on diverse issues” that banks are required to send to the RBI.
In fact, the management information systems of each bank
exist mainly to provide vital information to the RBI, writes Mr Bhat.
Third, let me share a reply by the Ministry of Finance
(MoF) to the Standing Committee on Finance
(39th Report). It shows that the RBI
is deeply immersed in how banks handle bad loans such as “distressed asset framework, flexible structuring of loans, change of management through Strategic Debt Restructuring etc”. That apart, a Central Repository of Information on Large Credits (CRILC) has been created to collect, store and disseminate data on all borrowers' credit exposures including Special Mention Accounts. Not only that, “the RBI
checks the implementation and enforcement of the guidelines on NPA management on a sample basis across all banks during the Annual Financial Inspection and Risk Based Supervision”. Cases of non-compliance are sent to the banks, and banks are asked to comply with the guidelines and make appropriate provisions.
Then, the RBI
tracks the banks’ compliance with these observations through a Monitorable Action Plan/Risk Mitigation Plan. Plus, the banks’ internal auditor, concurrent auditor and statutory auditors examine and report on the compliance of RBI
instructions on income recognition, asset classification and provisioning norms. Apart from the inspection of individual banks carried out every year, the RBI
also conducted a system wide Asset Quality Review
in 2015-16, which covered major banks (including all PSBs and SBI associates). This constituted more than 80 per cent of the funded outstanding of the banking system. To ensure that the “RBI
exercises its regulatory power including taking punitive action against banks in cases of default, it has been decided to formalise a Supervisory Enforcement Framework by June 2016,” states the MoF in its reply to the Parliamentary committee.
Clearly, to claim that the RBI
doesn’t have much powers and cannot prevent PSBs from irresponsible behaviour that has repeatedly unfolded over the years is simply not true. The RBI’s powers over PSBs are extensive, intensive and unambiguous. It must now explain why and how it has allowed bad loans to boom to Rs 10 trillion.
The writer is the editor of www.moneylife.in