Public as Banking Regulators

What is the issue?

• The latest PNB fraud case has highlighted the deficiencies in procedures and regulatory controls in the banking sector.
• It calls for assessing the space for public in playing a regulatory role.

How does RTI help?

• Under the Right to Information (RTI) Act, applications were filed in 2011-12 before for RBI and NABARD.
• The information sought comprised copies of -

1. inspection reports on banks
2. details of action taken against banks in breach of the relevant laws and regulations
3. advisory notes issued by the RBI to banks and non-performing asset accounts

• However, RBI and NABARD denied information regarding these.
• The denial of information was on the ground that disclosure would prejudicially affect the economic interests of the state.
• The reasoning was that this would cause loss of public faith in some banks.
• Also, the information had been received from the banks concerned in a fiduciary capacity (trustee).
• Hence, it could not be disclosed to third parties.
• Following this, the Central Information Commission (CIC) considered appeals from RTI applicants.
• Overruling, the CIC ordered the disclosure of a good deal of information.
• However, its decisions were stayed by High Courts.

What was the SC ruling?

• The decisions by the CIC were considered and upheld by the Supreme Court.
• The court ruled that regulatory bodies were not in a fiduciary relationship with the banks that had provided the information.
• The Supreme Court also rejected the argument that information disclosure would hurt the economic interest of the country.
• The judgment has also guided subsequent decisions of the CIC in such matters.

What were the CIC's directions?

• The CIC has also directed disclosure of following information in respect of wilful defaulters and absconders -

1. amount disbursed
2. grounds underlying the decision
3. rate of interest
4. collaterals obtained
5. the outstanding amount
6. steps taken for recovery, etc

• This direction overrode the ground of the fiduciary relationship of banks with their customers.
• The decisions are based on Section 8(2) of the RTI Act.
• Accordingly, notwithstanding the exemptions from disclosure, certain information can be disclosed.
• This is provided that the public interest in disclosure outweighs the harm to the protected interest for denial of information.

Why is public disclosure significant?

• Institutions that take the responsibility of managing public funds are answerable to the people.
• The argument that such information is the exclusive preserve of those in the government and regulatory bodies is baseless.
• Confidence of people in financial institutions should not be sustained by hiding information concerning their wrongdoings.
• On the contrary, people ought to have all the information, good or bad, to make informed decisions about dealing with them.
• Above all, well-informed people can discharge the role of a watchdog.
• This can be far more effective than all the regulatory bodies put together. This is because opacity deprives them of that role.

What should de done?

• Disclosure - Any fraud in a financial institution or a case of wilful default is a matter of public interest.
• Complete transparency concerning the amount involved should be made public.
• Also, the factors and persons responsible for the loss should be made known to the public.
• Laws - The RBI also restrains from disclosing the names of wilful defaulters to the public.
• It is argued that doing so would affect the third parties.
• Certain amount of confidentiality about the information was also claimed under provisions of the RBI Act.
• Thus, the law on these issues should be clarified further as a result of future judicial pronouncements.
• Laws that prevent disclosure of even essential information should suitably be modified, to have transparency in banking functions.

Source: The Hindu