End dual control of public sector banks, says Former RBI governor Y V Reddy

Former Reserve Bank of India (RBI) Governor Y V Reddy on Thursday said dual control of public sector banks (PSBs) should end. “PSBs should be either converted into companies and the control should be with the Reserve Bank of India (RBI), or, it should entirely be under the government,” said Reddy at the third anniversary function speech of Bandhan Bank.

A few months back, RBI Governor Urjit Patel had highlighted the limited powers that the central bank enjoys over the PSBs.

Reddy said the Narasimhan committee in the 1990s had suggested putting an end to dual control, but it was not implemented.

“There are two aspects to the regulation and supervision of the banks — governance and prudential regulation... The RBI regulates both the governance aspect and the prudential aspect of private sector banks. In the case of PSBs, the government exercises all powers relating to governance, leaving prudential regulation to the RBI. This has been identified as… the problem of dual control,” he said.

Reddy said a “strategic view” should be taken when it comes to the merger of banks.

“We must take a strategic view. Both public and private sector banks should be present and compete. Roughly, 30 per cent of the business should be with PSBs,” said Reddy.

Reddy called for putting an end to “populist negativism” in the banking sector. He said if there was no criminal conviction, investigative agencies should take a different view in dealing with those who are held responsible for problems in the banking sector.

He also said there should not be generalisation in dealing with defaulters.