“The RBI is primarily a referee, not a player in the process of commercial lending. Its nominees on bank boards have no commercial lending experience and can only try and make sure that processes are followed,” he said in a note to Chairman of Estimates Committee Murli Manohar Joshi.
“They (RBI nominee) offer an illusion that the regulator is in control, which is why nearly every RBI Governor has asked the government for permission to withdraw them from bank boards,” he said.
The Parliamentary Committee on Estimates had invited Rajan to brief it on the matter after former Chief Economic Advisor (CEA) Arvind Subramanian praised him for identifying the NPA crisis and trying to resolve it.
Even Rajan’s successor and present RBI Governor Urjit Patel had suggested withdrawal of nominee directors from the boards of public sector banks (PSBs) to avoid any conflict of interest.
The central bank is discussing the matter of RBI nominee director with the Finance Ministry, Patel had informed Parliamentary Standing Committee on Finance.
Rajan also said bankers, promoters, or their backers in government sometimes turn around and accuse regulators of creating the bad loan problem but the truth is bankers, promoters, and circumstances create the bad loan problem.
“The regulator cannot substitute for the banker’s commercial decisions or micromanage them or even investigate them when they are being made. Instead, in most situations, the regulator can at best warn about poor lending practices when they are being undertaken, and demand banks hold adequate risk buffers,” he said.
The important duty of the regulator is to force timely recognition of NPAs and their disclosure when they happen, followed by requiring adequate bank capitalization, he said, adding, this is done through the RBI’s regular supervision of banks.