Leave RBI alone

CAG audit will not help banks run better

The comptroller and auditor general (CAG) has mooted that the Reserve Bank of India (RBI) should be brought under the audit purview of his department. He has argued that there is a need for this in view of the increasing ill health of the nationalised banks, whose non-performing assets (NPAs) have in the last couple of years gone up sharply while being under the supervision of the RBI. In support of this idea, he has cited the increasing supervision of the US Federal Reserve in the aftermath of the financial crisis that gripped the global economy with the collapse of the "sub-prime bubble" (offering loans to borrowers who did not make the cut to acquire real estate, thus leading to unsustainable valuations in that asset class). In the first place, the cause of the ill-health of India's public sector banks (PSBs) is quite different from the financial crisis that gripped the western economies with the collapse of Lehman Brothers. The problems in India started after the global slowdown affected Indian corporates too, who found their cash flows inadequate for servicing their bank borrowings. Merely ordering a CAG audit, therefore, is unlikely to restore the Indian banking sector's health.

Additionally, it is important to note that India's PSBs are ill, but not their private sector counterparts. PSBs suffer from the handicap of being owned by the government. This leads to many self-serving bank managements offering loans to serve the businessman-politician nexus that manifests itself in crony capitalism. Thus, the problem lies in the vehicle through which government ownership is exercised. The right place for the CAG's department to begin, in order to find out what has gone wrong in the banks, is the Union finance ministry, which has equipped the banks with inadequate management structures. The CAG's mandate covers the Union finance ministry. The problems of ownership have already been recognised and the Banks Board Bureau has been established under the leadership of the former CAG, Vinod Rai, in order to put in place professional managements that will in future be insulated from political influence.

The reason why Mr Rai holds the position that he does is the stature he acquired during his stewardship of the CAG's department, which unearthed the manner in which spectrum and mining leases were doled out. Institutions matter more than individuals, but the reality is that both the CAG's department and the RBI have been seen to be delivering exceptionally under the leadership of exceptional individuals like Mr Rai and Raghuram Rajan. It is under the latter's leadership that the RBI put in place mechanisms which prevented banks from continuing to sweep NPAs under the carpet. It is to be hoped that the central bank would continue to keep a tight vigil on this area under its new leadership as well.

The reality is that banks are commercial institutions and their managements have to feel confident that professional decisions taken by them in good faith will not be questioned later with the benefit of hindsight. If, in addition to "vigilance", bank officials have to worry about CAG "paragraphs", then loans will hardly get sanctioned. There is no need for the CAG to second-guess the credit decisions of banks or the RBI's supervision of them. The RBI is already audited under existing rules and there is no need to do anything that may be seen to be undermining its autonomy. The attempt at overreach by the CAG seems to be a reflection of the ingrained tendency of bureaucracies to try to extend their domains.