RBI Governor Urjit Patel met the Parliamentary Standing Committee on Finance recently, and was questioned on multiple financial issues.
At a time when most Public Sector Banks (PSBs) are posting losses, the RBI governor has asked for powers to exercise regulatory oversight over the banks.
What transpired in the ‘Standing Committee’ investigation?
The committee raised a lot of queries on wide-ranging issues — from the impact of demonetisation, and status of the Non-performing Assets (NPAs).
Notably, of the 21 PSBs, only two have posted profits in 2017-18, with the combined losses of the others touching Rs873 billion.
Regulatory lapses of public sector banks (PSBs) in the context of the Rs. 11,000 crore “Nirav Modi scandal” also featured prominently.
However, Mr. Patel refuted the notion that the RBI had failed in its regulatory role and shifted the blame on bad decision making by the bank boards.
In this context, he demanded greater powers for RBI to better regulation of the banking sector as whole.
He also vouched that RBI shouldn’t have nominees on bank boards in order to avoid conflict of interest between banking supervision and bank operations.
Are the RBI governor’s suggestions significant?
The Narasimham committee on banking sector reforms in the 1990s had recommended the RBI should relinquish its seats on the boards of banks.
But presently, RBI continues to nominate one or more directors to each PSB board from among either serving or retired executives.
The P J Nayak Committee in 2014 had argued that the withdrawal of RBI nominees from PSB boards should be done in a phased manner.
The RBI governor also seems to have reiterated this demand, which seems to be a valid one that merits serious consideration.
The government has resisted the process so far as it feels that the presence of RBI nominees improves the working of PSB boards.
However, it is time the government sheds its reluctance and facilitates the process to allow the RBI to ring in the changes.
More powers to regulate banks is also a positive as it will make RBI’s regulatory role ownership-neutral and bring public and private banks on par.
