Reserve Bank of India’s (RBI’s) has asked the government for removing its nominees from the Public Sector Bank’s boards.
While this is part of the good governance reforms, the union government has refused to concede the same, which is unfortunate.
What does the RBI need?
RBI has been repeatedly asking the finance ministry to allow the central bank to distance itself from the boards to avoid a clear conflict of interest.
This is a long standing articulated by multiple ‘RBI Governors’ as it feels that its presence in the boards is hindering its regulatory role.
Way back in the 1990s, the Narasimham committee on banking sector reforms had recommended that the RBI should give up its seats on the board.
Further, in 2014, P J Nayak committee, on governance of bank boards, argued in favour of withdrawal of RBI nominees from PSB boards.
Notably, the Nayak committee favoured a phased shift from the current, by slowly increasing the capacity of bank boards to take decisions.
What is the government’s stand?
Government recently rejected RBI’s demand in this regard.
As PSBs have over the past few years, accumulated massive non-performing assets (NPAs), the government seems to be towing with caution.
It seems to believe that without the presence of an RBI nominee, PSB boards may make more mistakes at this critical juncture.
While banks have been criticised sternly for having taken imprudent decisions, the RBI too, has been criticised for failing to supervise the PSBs.
But the RBI feels that it has been handicapped by regulations as it is essentially part of both the decision-making process as well as supervision.
Notably, profits of PSBs have nosedived lately because of the RBI’s insistence on more transparent recognition and provisioning of NPAs.
What is the way ahead?
The government seems to be confused on the RBI’s unambiguous stand that it can involved in the bank’s board and act as a regulator.
Going by government’s current stand, regulators in other domains should also have their nominees on the boards of PSU companies they supervise.
As this is absurd and the government must reconsider this, and bring about the legislative change that is required.
