Revamping RBI's Regulatory Power

Why in news?

• The RBI Governor has highlighted some fundamental limitations existing in relation with RBI's regulatory power.
• This comes as a response to government blaming the RBI for the recent PNB scam.

What was government's response to the scam?

• The government, soon after state-owned Punjab National Bank's fraud case, accused the RBI for its supervisory failures.
• It also blamed the bankers and auditors for their shortfalls.

What are the RBI's concerns?

• RBI governor made mention of RBI’s warnings about possible risks, but said that the PNB’s internal systems failed to take note of it.
• In response to the government's accusation, the RBI governor Urjit Patel pointed out the limitations to RBI’s power.
• He highlighted the issues such as -

1. the absence of powers to remove the directors on the management of PSU banks who are appointed by the government
2. the lack of power to force a merger or trigger liquidation of a state-owned bank
3. the limited legal authority for RBI to hold these bank boards accountable

• The government, the owner of public sector banks, still control a dominant share of the country’s banking business.
• RBI Governor pointed out that the banking regulatory powers were not 'ownership neutral' in India.
• This is possibly why the RBI could not fully exercise its powers to crack down on corporate governance issues at state-owned banks.
• A system of dual regulation, by the finance ministry in addition to RBI, has resulted in ineffective banking regulation.
• Patel urged the government to strengthen the Banking Regulation Act, 1949 to give RBI enough power to regulate PSU banks.

What is the way forward?

• The RBI’s stance is valid, given the discomfort with knee-jerk reactions and the blame games since the fraud came to light.
• The greater challenge is governance reform in banks.
• The government should swiftly settle the issue of separation of ownership and regulatory control.
• It can consider making the regulatory powers of RBI fully “ownership neutral”.
• Besides, privatisation does appear to be an easy option to address some of the concerns.
• But it is important to see whether such an option should be exercised during a crisis.

Source: Indian Express, The Hindu