Regulating PSBs: House panel may favour more power to RBI

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New Delhi | Published: July 23, 2018 3:55:59 AM

The parliamentary standing committee on finance may suggest giving more power to the Reserve Bank of India (RBI) to better regulate public sector banks (PSBs) that have come under heightened public scrutiny following a string of scandals, a source told FE.

The Reserve Bank of India (Reuters)

The parliamentary standing committee on finance may suggest giving more power to the Reserve Bank of India (RBI) to better regulate public sector banks (PSBs) that have come under heightened public scrutiny following a string of scandals, a source told FE. Last month, RBI governor Urjit Patel appeared before the panel, headed by senior Congress leader Veerappa Moily, and is reported to have sought more power to regulate PSBs as effectively as private sector banks. “Some of the members think the government should consider giving more power to the RBI if such a move can better prevent frauds at PSBs,” said the source.

The committee will also push for better governance standards at PSBs. It will likely to submit a report on reforms in banking in a month. The panel could also express its concerns against arrests of bankers without credible evidence of wrong-doing, as any such move would hamper decision making. Finance minister Piyush Goyal last month said the government believes power is already available with the RBI. Still, the government is open to giving more power to the central bank if it is required to regulate and supervise public sector banks (PSBs) better, he added.

At present, while all private banks are regulated by the RBI alone, PSBs are regulated by both the government as well as the central bank. In fact, after facing criticism over the supervisory failure to detect the $2.2-billion fraud at Punjab National Bank involving jewellers Nirav Modi and Mehul Choksi, the RBI governor had in March asserted that regulation of banks must be ownership-neutral.

As per the existing system, the RBI cannot remove (errant) directors, chairman and management at PSBs, although it can do so in private banks if the situation so warrants. Section 36ACA(1) of the Banking Regulation (BR) Act that provides for supersession of a bank board is also not applicable to PSBs. The central bank cannot force a merger of PSBs either. PSBs’ banking activity does not require licence from the RBI; hence, the central bank cannot revoke a licence unlike the case of private banks.

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