If you can issue debt, stay put on PSB boards too: finmin to RBI

Written by Arun S | New Delhi | Updated: Mar 19 2014, 10:52am hrs
Even as the Reserve Bank of India (RBI) cited conflict of interest in its unwillingness to be on the boards of public sector banks (PSBs) and wanted its nominee directors to step down, the government has lobbed the ball squarely back into the banking regulators court. If that were the case, North Block has asked the central bank, why has the RBI long opposed the plan to divest it of the job of managing public debt.

Many expert committees, the finance ministry notes, had said RBI's present subsidiary functions like debt management could lead to its taking sub-optimal decisions in ensuring price stability, due to multiple conflicts of interest. For instance, the Percy Mistry panel on Mumbai as International Financial Centre had warned that such multi-tasking could interfere with the RBI's principal role as monetary authority.

We have hit them where it hurts the most, a finance ministry official told FE, although in a lighter vein, referring to a recent communication to the RBI asking them to stay put on PSB boards, given the exigency of these banks having high bad debts.

The ministry, of course, values the RBI nominee directors wide-ranging experience and sound knowledge base, which it reckons would help the PSBs overcome the current difficult situation. As the economy recovers and NPAs fall to comfortable levels, the RBI nominees could consider stepping down, the ministry feels.

In the interim budget 2014-15 speech, the finance minister P Chidambaram had said that the government was ready with the Public Debt Management Agency (PDMA) Bill to set up an independent debt management office.

Following precedent, it is proposed to establish a non-statutory PDMA that can begin work in 2014-15, the minister had said. The precedent that the minister talked about was about the pension regulator PFRDA being an interim regulator without statutory status from 2003 till the recent passage of the PFRDA Bill.

The sources said a Cabinet note is being prepared to set up the PDMA through an executive order so it can start functioning immediately. In due course, it would be awarded statutory status with the passage of the PDMA Bill in Parliament, which is left for the next government to initiate.

The finance ministry already has a middle office looking into public debt management issues, which is likely to be merged with PDMA once it is created.

The MoF-RBI spat over RBI being on PSB boards was triggered by the crisis at the United Bank of India. An RBI report has offered many suggestions to salvage the troubled UBI including RBI superseding the banks board. Disinclined to accept the proposal, the ministry has blamed RBI nominee directors on the PSB boards for not being alert enough and failing to issue early warnings and take preventive steps. Irked by the ministry's stance, the RBI offered to step down from PSB boards, saying there was anyway a conflict of interest in the 'regulator' being on the boards of regulated entities.