There is a larger mandate

The composition of the Board of the Reserve Bank of India (RBI) represents the character of the institution – that it is not just a monetary authority, but that with a much larger mandate.

The fact that monetary policy – a domain of the governor which was moved to a monetary policy committee – gives a framework of decision making on that function. But there are issues beyond monetary policy, given that the RBI is a full service central bank.

Its mandate goes beyond covering banking regulation, currency management, foreign exchange management and also includes a developmental mandate. If we look back, we find that the RBI consistently had conflicting roles of being a player in the financial and financial services market, but also that of a regulator. It had managed these roles quite well, exiting from active participation and investments at an appropriate time. The theoretical composition of the RBI Board represents this larger mandate. The question therefore is about how effectively the current governance structure is functioning.

Let us look at the functioning of the current Board. On November 8, we know from publicly available sources that two of the 10 existing members of the Board (total strength is 21) could not attend the meeting. One absence was that of a full-time deputy governor (DG). This should raise some questions as to why on such an important matter it became difficult for a DG not to attend a board meeting. Even under normal circumstances it is unlikely that a DG abstains from the meeting of the Central Board.

Let us assume that this was a decision taken by the RBI Central Board after due deliberation, after taking as much inputs and applying the mind (of whoever was available). What is the role of the Board after the event? Given such a public outcry on the role of the RBI in the implementation of the withdrawal of banking networks has there been a need for the board to meet and take stock of the situation and advise the bank on how the issues could be handled? The Central Board met on December 15 in Kolkata and the press release by the RBI just says that the Board reviewed “current economic situation, global and domestic challenges and other specific areas of operations of the RBI” – nothing to reassure the people that the Board, having taken such a monumental decision on November 8, thoroughly reviewed the impact of the decision. 

In recognition of the developmental role that the RBI undertakes, the institution has four regional boards. These boards are expected to bring up local issues, talk about cooperatives and institutions nearer to the people. None of the board positions have been filled after the current government has assumed office. In the process of withdrawal of specified bank notes and the aftermath of exchange of old currency notes, district co-operative banks across the country – all of them licensed by the RBI – were left out from the exchange process, causing much hardship to the farming community who have been traditionally dealing with local institutions like the cooperatives. The neighbourhood touchpoints were rendered useless, their apex institutions were rendered useless and there was a discrimination against an institution duly licenced by the RBI. This issue would have been discussed threadbare in the local board of the RBI, if there was one. It is evident that the structures that are inherent within the edifice of the RBI are compromised, without appreciating that the structures have been set up with a specific purpose.

If the regional Boards of the RBI were functioning, and the Central Board was in full strength, it would have only been better for the governance of the RBI – it would have brought to fore the concerns from each of the regions. It would have brought in a diverse set of external opinion to bear on the management of this situation. In the composition of the Central Board, it is envisaged that while 14 members on the Board represent independent thought from the industry, agriculture, social service and academia, the full-time members and ex-officio nominees are only seven in number. The intent of this composition is that the RBI is guided by independent opinion. If the effective board currently has seven officials and 14 independent members and no regional Board, it is as good as a Board that does not seek and get external inputs.

The question is not whether the RBI needs governance reform. It is a robust institution that has adequate governance structures. Unfortunately, those structures are not adequately equipped and the RBI is working in a silo where a moral authority from outside is unable to guide and protect the autonomy of the RBI. It is not just the governor of the RBI who fights for the autonomy and credibility, s/he gets the moral strength from a full-strength Board backing the governor.

(The writer is a professor at IIM-B and was a member of the Board of Governors, Union Bank of India)