Following major differences between the Reserve Bank of India (RBI) and the finance ministry on how to reform and improve the functioning of public sector banks (PSB), a high-level panel has been formed to iron out the contentious issues.

The panel comprises RBI governor Raghuram Rajan, financial services secretary G S Sandhu and additional secretary in the department of economic affairs, KP Krishnan.

It will soon meet to consider the issues given the ?hard stances adopted by both sides (the ministry and the RBI),? finance ministry sources told FE.

The RBI proposed splitting the post of the chairman and managing director (CMD) of a PSB and appointing professionals from outside (the private sector) to the posts of chairmen, managing directors and executive directors at PSBs by offering them remuneration at ?market rates.?

It also wants the PSB board to be revamped in order to give them more functional independence. The RBI felt that powers are now concentrated on one person (the CMD) and even the board of the bank in most cases toes the line taken by the CMD and does not counter him/her on decisions.

However, the ministry opposes the bifurcation of CMD?s post, saying the RBI?s view (that the CMD is all powerful) is not correct and that it is not true that the CMD routinely turns down the board?s views. The ministry feels that it won?t be possible for PSBs to shell out huge salaries to its top brass (the gap between the top-level PSB and private bank salaries is huge).

The sources said the RBI also pointed to the surge in the non-performing assets in PSBs and told the ministry that in order to ensure a strong credit appraisal system that will monitor the risks involved in the extension of credit, it was important to professionalise the management of PSBs.

In fact, the RBI?s views are not entirely new. In 2002, an RBI panel under the chairmanship of A S Ganguly had suggested that it would be desirable to separate the office of CMD in respect of large-sized banks. ?Keeping in view the balance sheet size, sophistication of business transactions and complexity of the bank, the office of CMD could be bifurcated into two: the chairman who is the chairman of the board and the managing director who could function as the chief executive responsible for day-to-day management of the bank.?

At present, private sector banks have no CMD posts.

In PSBs, the SBI has bifurcated the CMD?s post and it currently has five MDs reporting to the chairman. Other PSBs are headed by CMDs.

Regarding paring its stakes in PSBs, the finance ministry is currently of the view that it will permit the PSBs to raise additional capital on the condition that the government?s shareholding will not go below its existing levels.