What is the issue?
- Reserve Bank of India’s (RBI’s) has asked the government for removing its nominees from the Public Sector Bank’s boards.
- While this is part of the good governance reforms, the union government has refused to concede the same, which is unfortunate.
What does the RBI need?
- RBI 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 a long standing articulated by multiple ‘RBI Governors’ as it feels that its presence in the boards is hindering its regulatory role.
- Way back in the 1990s, the Narasimham committee on banking sector reforms had recommended that the RBI should give up its seats on the board.
- Further, in 2014, P J Nayak committee, on governance of bank boards, argued in favour of withdrawal of RBI nominees from PSB boards.
- Notably, the Nayak committee favoured a phased shift from the current, by slowly increasing the capacity of bank boards to take decisions.
What is the government’s stand?
- Government recently rejected RBI’s demand in this regard.
- As PSBs have over the past few years, accumulated massive non-performing assets (NPAs), the government seems to be towing with caution.
- It seems to believe that without the presence of an RBI nominee, PSB boards may make more mistakes at this critical juncture.
- While banks have been criticised sternly for having taken imprudent decisions, the RBI too, has been criticised for failing to supervise the PSBs.
- But the RBI feels that it has been handicapped by regulations as it is essentially part of both the decision-making process as well as supervision.
- Notably, profits of PSBs have nosedived lately because of the RBI’s insistence on more transparent recognition and provisioning of NPAs.
What is the way ahead?
- The government seems to be confused on the RBI’s unambiguous stand that it can involved in the bank’s board and act as a regulator.
- Going by government’s current stand, regulators in other domains should also have their nominees on the boards of PSU companies they supervise.
- As this is absurd and the government must reconsider this, and bring about the legislative change that is required.
Source: Business Standard