Conflict of interest

RBI should be allowed to withdraw its nominees in PSBs

The Union government’s decision to turn down the Reserve Bank of India’s (RBI’s) demand to remove its nominees on the boards of public sector banks (PSBs) is unfortunate. RBI Governor Urjit Patel 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 not a new demand. Even Mr Patel’s predecessor, Raghuram Rajan, asked for a similar shift during his stint. In August 2016, Mr Rajan wrote to the government arguing that the “RBI would perform a purely regulatory role, and withdraw its representatives on bank boards”. Indeed, the demand for this dates back even earlier.

Way back in the 1990s, the Narasimham committee on banking sector reforms had recommended that the RBI should give up its seats on the boards of banks. In fact, in 2006, the government of the day amended the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, to remove the provision which necessitated the appointment of an RBI official on the boards of PSBs. However, this amendment 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”. Then, in 2014, the P J Nayak committee, which evaluated the governance of bank boards in the country, argued in favour of withdrawal of RBI nominees from PSB boards. The only difference was that the Nayak committee favoured a phased shift, driven by an increase in the capacity of bank boards to take decisions.

The timing of the government’s decision is crucial since India’s PSBs have, over the past few years, accumulated massive non-performing assets. As the quarters have rolled by, the profits of PSBs have nosedived because of the RBI’s insistence on more transparent recognition and provisioning of non-performing assets (NPAs). While much of the heat has been on the way banks have gone about taking their lending decisions, the RBI, too, has been criticised increasingly for failing to supervise the PSBs. But, as both Mr Patel and Mr Rajan said in the recent past, the RBI feels handicapped by regulation. After all, how can it be part of both the decision-making process as well as supervision? This is exactly what Mr Patel told a parliamentary panel in June when he was questioned on the rising mountain of NPAs in the banking system.

On its part, the government has not publicly explained its rationale for ruling out the demand. But, media reports have said the government does not think the timing is right. In other words, it believes that without the presence of an RBI nominee, PSB boards may make more mistakes at a time when the margin for error has all but disappeared. It also appears confused about the RBI’s stand: How can the regulator want more powers to supervise but not want to be part of the PSB boards? But this only betrays a lack of understanding about ground realities. By the government’s logic, all regulators should be asked to have their nominees on the boards of each and every public sector company they supervise. This is absurd. The government must reconsider its stand, and bring about the legislative change that this requires.