Arguing for the importance of RBI’s (Reserve Bank of India) presence in the banking sector, the Finance Ministry has turned down the central bank’s request for pulling out its nominee directors from the boards of public sector banks, the Indian Express reported citing unidentified sources.
The RBI, in its communication with the government, had demanded that its nominee directors should be distanced from the PSU Banks’ management committee of the board, which takes crucial decisions, or should not be sitting on the board of PSU banks in the first place as it hampers effective regulation and leads to conflict of interest.
Former RBI Governor Raghuram Rajan had raised the demand of withdrawing nominee directors from the PSU banks’ boards and the same was reiterated by present Governor Urjit Patel.
When Nirav Modi-led Rs 13,000-crore fraud at Punjab National Bank came to light, the government pointed fingers on the RBI too, citing the supervisory lapses on the part of the central bank. RBI, however, said that the supervisory process of the regulator does not constitute an audit of banks and does not seek to replace it.
Governor Urjit Patel also pointed out the lack of powers the central bank has over the public sector banks, as compared to the private banks, which include a mandate to remove the Chairman and Managing Director of a private sector bank and to appoint them.
Other powers that RBI enjoys over private banks, and not over PSU banks, are removing managerial and other persons from office, calling a meeting of directors of the bank concerned, appointing observers, superseding the board of directors as well as making application for winding up and amalgamation.
In order to turn PSU banks around by conserving capital and cutting down their losses, a total of 11 banks have been put under the RBI’s Promot Corrective Action (PCA) framework, which puts certain lending and managerial restrictions on these banks.
Now, neither the government is receptive of the RBI’s idea of withdrawing its directors, nor it wants the RBI to have additional powers over regulation of PSU banks, as the government is of the view that the regulator already enjoys sufficient powers, sources told the paper. The government wants the regulator to be supportive at this stage and to continue playing its important role in the public sector banks’ normal functioning.
Last month, in a report, the Parliamentary Standing Committee on Finance suggested forming a high-powered committee to evaluate the role, powers and authority of RBI in its entirety, apart from appraising the economic impact of the various NPA resolution guidelines or schemes by the banking regulator.