Govt decides against removing RBI nominees from PSB boards, cites NPA issue

The government has decided to turn down the Reserve Bank of India’s (RBI’s) demand for removing the regulator’s nominees from the boards of public sector banks (PSBs). 

The government felt the presence of the RBI’s nominees on boards should continue at a time when the banks were grappling with bad loans and dealing with various cases of frauds, said a senior official. 

“A communication was sent by the finance ministry to the RBI last month conveying the government’s decision, which had the approval of Finance Minister Piyush Goyal,” said the government official. 

RBI Governor Urjit Patel had said in June that no central bank nominee should be on the board of PSBs in a bid to avoid “conflict of interest”.

At present, the RBI is required to have its nominees on the boards of all PSBs. Since there was no statutory requirement in the case of private sector banks, the RBI had withdrawn its nominees from all such banks long ago. 

Though, in its communication to the RBI, the government did not assign any specific reason for its decision, officials said it was not the opportune time to go ahead with this move. 

“On the one hand, the RBI is demanding greater control over PSBs, on the other, it wants to remove its representatives from the boards of these banks,” said another government official. 

RBI Governor Urjit Patel had told the Parliamentary Standing Committee on Finance in June that the central bank was in talks with the finance ministry to discontinue the practice of appointing its nominees on the boards of PSBs. 

“RBI nominee directors should be distanced from the management committee of the boards (which take credit decisions) to avoid any conflict of interest and the RBI nominee should not be on the boards of PSBs”
 

URJIT PATEL

RBI governor

“RBI nominee directors should be distanced from the management committees of the boards (which take credit decisions) to avoid any conflict of interest and the RBI nominees should not be on the boards of the PSBs,” he had told the panel. Patel had also said that the main role of directors, including nominee directors, on a bank’s board was to ensure that the bank was managed efficiently and professionally.

A similar demand was made by Patel’s predecessor Raghuram Rajan, who had said in August 2016 that the “RBI would perform a purely regulatory role, and withdraw its representatives on bank boards” which would require a change in the legislation. 

“RBI would perform a purely regulatory role, and withdraw its representatives on bank boards — this will require legislative change”
 

RAGHURAM RAJAN

Former RBI governor

During Rajan’s tenure, the RBI had written to the central government seeking permission to withdraw its nominees from bank boards, except when there were special concerns. At present, the government nominates its officials as directors in PSBs. Similarly, the RBI sends its recommendation to the government to nominate a director, who can either be a serving or a retired executive, on the board of PSBs.  

In cases where banks are troubled or raise special concerns, the regulator can nominate more than one member on the board. 

A committee under veteran banker P J Nayak, which had submitted a report in 2014 to review the governance of banks, was in favour of removing the central bank’s nominees from PSBs. It had, however, recommended that this could only happen when the boards of PSBs were adequately empowered. 

“RBI directors should step down from bank boards after they are fully empowered, unless a bank is troubled or raises special concerns” 
 

PJ NAYAK

Veteran banker (former chairman of Axis Bank)

The principle that RBI as the regulator and supervisor of banks should not be on bank boards, and therefore not be party to bank management decisions, was unexceptional, the committee had said.  

The committee was of the view that the PSB boards do not function cohesively at present and noted the “widespread view that RBI nominee directors carry weight with non-official directors and that their views act as a stabilising advocacy.” 

KEY TAKEAWAYS

There are 8 categories of public sector bank (PSB) directors

WHOLE- TIME DIRECTORS  
 

• Chairman and executive directors
• Central government officials
• RBI and government nominees
• Chartered accountants
• Employee and officer representatives

• RBI sends recommendations for its nominees, who have to be experts in bank regulation and supervision, to central government for PSBs

• RBI’s nominee directors are members of management committee of the board which clears high-value credit proposals, write-off proposals, capital and revenue expenditure, among others

• RBI nominee directors are part of the executive committee of State Bank of India

Though the government had amended the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, in 2006 to remove a provision for mandatory appointment of an RBI official on the boards of PSBs, the change still required the RBI to send recommendations to the government to appoint a nominee with “expertise and experience in matters related to regulation or supervision of commercial banks.”