RBI's powers over PSBs: What's the truth? - I

About a month ago, reacting to the strident criticism of failing to prevent rampant corrupt practices in public sector banks (PSB), Reserve Bank of India (RBI) Governor Urjit Patel argued, perhaps for the first time, that the RBI had very little powers over PSBs. Last fortnight I wrote that bank chairmen narrated plenty of anecdotes about the RBI’s powers if it chose to use them. A week ago I re-read Mr Patel’s speech, including all the sections under which, he said, the RBI is prevented from acting against PSBs and spoke to a few senior people. In this article, I will relate what he had claimed and what the law says — or at least the common understanding of what it appears to say. 

1. “All commercial banks in India are regulated by the RBI under the Banking Regulation (BR) Act of 1949.”

This statement itself establishes that the PSBs come under the BR Act. Section 5 (b) of the BR Act defines banking as “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”. And Section 5 (c) defines a “banking company” as “any company which transacts the business of banking in India”. Clearly, the Act does not apply differently to differently-owned banks. So, we will have to assume the BR Act applies to the PSBs. Or, we will have to find sections which explicitly exclude the PSBs from the BR Act. Unless such exclusion exists, we have to assume the BR Act applies to them. 

2. “Additionally, all public sector banks are regulated by the Government of India (GoI) under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; the Bank Nationalisation Act, 1980; and the State Bank of India Act, 1955.”

The Banking Companies Act, 1970, applies to the banks nationalised in 1969, that is specifically to the PSBs. Section 9A of that Act specifies the powers of the RBI to appoint additional directors to banks. And Section 9(3B) of the Act allows the RBI to remove such directors. There cannot be ambiguity here because this Act applies only to the PSBs.

3. “Section 51 of the amended BR Act explicitly states which portions of the BR Act apply to the PSBs, most common thread across the omissions being complete removal or emaciation of RBI powers on corporate governance at PSBs.”

Cutting through the thicket of clauses and sub-clauses, it appears that Section 51 does not state which portions of the Act apply to the PSBs. The title of the Section is: “Application of certain provisions to the State Bank of India and other notified banks.” The Section states that without prejudice to the provisions of the State Bank of India Act or any other Acts, a bunch of crucial provisions of the BR Act “shall also apply; so far as may be, to and in relation to the State Bank of India [or any corresponding new bank or a Regional Rural Bank or any subsidiary bank] as they apply to and in relation to banking companies”. Indeed, this Section makes it explicit that SBI, the other PSBs and the rural banks are included for most purposes in the BR Act. 

4. “RBI cannot remove directors and management at PSBs as Section 36AA(1) of the BR Act is not applicable to the PSBs.”

Section 36AA(1) says that under certain situations the RBI can remove a chairman, director or chief executive officer, or other officer or employee of a banking company. Nowhere does Section 36AA(1) say the PSBs are excluded from the ambit of these provisions. In the BR Act at least I could not locate a provision that says Section 36AA(1) is not applicable to the PSBs.

5. “Section 36ACA(1) of the BR Act that provides for supersession of a Bank Board is also not applicable in the case of PSBs as they are not banking companies registered under the Companies Act.”

Section 36ACA(1) does not say that a banking company has to be registered as a company for this Section to apply. It only says that under certain situations, the RBI can, in consultation with the Central government, supersede the board of directors for six months. Nowhere does the Act say that the PSBs are excluded. Indeed, Section 51 (referred to above) makes it very clear that Section 36 is applicable to all banks.

6. “Section 10B(6) of the BR Act that provides for removal of the Chairman and Managing Director (MD) of a banking company is also not applicable in the case of PSBs.”
 

Section 10B(6) does not say that the PSBs are excluded. In fact, Section 10 is explicitly applicable to all banks under Section 51.
 

I am mystified how the governor concluded that some specific sections of the BR Act did not apply to the PSB. He would have had a case had the RBI tried to enforce some discipline in PSBs and hit the wall in Delhi. This does not seem to have happened under any of two previous governors under whom bad lending ballooned. 

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers