Economy

IAS Parliament 6 years

KEY POINTS

Arguments favouring the statement

Dual control over banks

· RBI’s banking regulatory powers were not 'ownership neutral' in India.

· It lacks the powers to remove the directors on the management of PSU banks who are appointed by the government.

· It lacks the power to force a merger or trigger liquidation of a state-owned bank.

· RBI has the limited legal authority to hold these bank boards’ accountable.

· In addition to ownership and governance-level control, there is also significant operational control that the Union finance ministry exercises.

· This is possibly why the RBI could not fully exercise its powers to crack down on corporate governance issues at state-owned banks.

Way forward

· There is a crying need for reforming the governance structure of public sector banks.

· The government should swiftly settle the issue of separation of ownership and regulatory control.

· There is a template (Co-operative banks model) for regulatory framework available to fast track the pending reforms on the ownership and governance of public sector banks.

· Also, deep reforms, as recommended by the P.J. Nayak committee, needs political will, which seems to be lacking every time.

Arguments against the statement

· Very much like the government exercising control, the RBI has also a board position in each public sector bank.

· Further, the RBI representative is on the management committee, the audit committee, the committee of directors and the remuneration committee of each of these banks.

· So, not only does the RBI have regulatory oversight, it has board and sub-committee presence in each public sector bank, which should give the RBI much greater insights than it would get into a private bank.

· Also, the RBI is party to the selection of the whole-time directors of the bank through the selection committee and through its membership on the Banks Board Bureau.

· The RBI has powers to remove the non-official directors appointed by the Union government as well as the shareholder directors if they do not fulfil the fit-and-proper criteria envisaged in the Banking Companies Act.

· Moreover, the RBI has powers to appoint an additional director as per the above said Act.

· Theoretically, the RBI has a significant say in the constitution of the board of a public sector bank.

Way forward

· The framework for the exercise of powers in private sector banks is different from the framework for public sector banks. This has to be recognized.

· In the current instance, it would have been more honourable for the governor to own up the failure, and use this opportunity for deep reform, than play victim.