RBI-finance ministry face-off augurs ill

RBI Governor Urjit Patel's statement at a function in Gandhinagar a few days back has set off a war of words between RBI and the finance ministry.

The governor had remarked that RBI does not have enough power over public sector banks (PSB) to regulate and prevent frauds like the one at PNB as a series of amendments of the Banking Regulation Act (BR Act) had taken away all its powers on issues like replacing banks' boards or on mergers or revocation of licence, etc.

The finance ministry hit back saying that RBI has enough powers under the BR Act and RBI Act to supervise and regulate banks inter alia to "appoint officers to banks, make changes in boards and management, inspect banks and their books, conduct audits and give directions in public interest (Sec 35), to impose penalty on erring banks (Sec 47) and the power to apply to central government for suspension of business in extreme cases".

The finance ministry was also clearly not amused and questioned RBI that when RBI was able to put 11 PSBs under Prompt Corrective Action (PCA) and also nudge them to refer the 12 top defaulting companies with NPAs to the NCLT (National Company Law Tribunal) for bankruptcy proceedings, what prevented RBI from taking corrective measures to fix banking loopholes.

What Patel was probably referring to when he spoke about RBI being helpless was the dual regulation of PSBs by the government and RBI and that this dual supervision "was bound to cause such fault lines or fissures and lead to tremors such as the most recent fraud".

He further said that RBI had more powers over private banks than PSBs and hence was powerless in detecting the PNB fraud. He hit the nail on the head when he spoke about the confusion created amongst PSBs by the dual supervision. So, as long as government keeps interfering in the affairs of the PSBs, RBI will continue to be a toothless tiger.

One instance of the changes that Patel was hinting at was the Banks Board Bureau, which was set up in April 2016 for a period of two years to improve governance in PSBs and recommend selection of chiefs and help banks develop strategies and capital raising plans.

While the finance ministry is cold shouldering and overlooking the BBB in appointments of PSB chiefs, it has diluted the powers of the RBI vested in it under Sec 35B of the RBI Act.

Patel also talked about the PCA framework and though RBI had brought 11 banks under PCA, there was no compulsion on PSB chiefs to comply with the guidelines as the ultimate authority over their tenure was still the government. So, it was business as usual for them.

Patel's speech at Gandhinagar was clearly out of frustration over the mess that the PSBs were in due to the dual control system.

Let go

After nearly 50 years of control and ownership over banks, has the time come for the government to wriggle itself out of the mess and not allow PSBs to go the Air India way?

Incidentally, banks were nationalised in 1969 after the passage of the Bank Nationalisation Act to pursue social goals. However, in the guise of pursuit of social goals, PSBs have been predominantly used to serve the interests of the political class.

The move was necessary and was justified at that time when the government of the day was pursuing socialism with an objective of correcting the imbalance in society and redistributing wealth in favour of the poor. What better way to do this than nationalising banks and using them to implement government schemes.

This suited successive governments and all of them, irrespective of their political hue, have been reluctant to let go of their control over the banks while being critical of rising NPAs and increase in frauds in PSBs. The present government on its part has not been consistent in handling issues in PSBs whether it's on mergers or governance or on recapitalisation.

The recent events have given an opportunity to the government to introduce reforms in the PSB space. For one, it can think of giving complete autonomy to RBI in its role as regulator and supervisor of the banking system so that it can fix responsibility when a shock of the PNB magnitude happens.

The government would acknowledge and appreciate one of Henry Fayol's principles of management on 'unity of command' - that an employee will perform better when he receives orders from one boss only, which should be the RBI in this case.

While this can give RBI control over PSBs, the government can think of diluting its ownership in PSBs in the long run and save taxpayers' hard-earned money, rather than using it to recapitalise banks.

(The writer is with Manipal Academy of Banking, Bengaluru)