RBI should not step into day-to-day activities of banks, says Subbarao

Former Reserve Bank of India governor D Subbarao ( pictured) on Wednesday said the regulator should not step into the day-to-day activities of banks, as it did not have the expertise to manage a lender’s business.

Subbarao was referring to the May 5 ordinance amending the Banking Regulation Act, which gave the central bank powers to suggest to, and even compel, lenders to invoke proceedings against defaulters.

RBI has identified 12 accounts, representing about 25 per cent of the gross bad loans in the banking system, which would be eligible for immediate reference for bankruptcy proceedings.

Subbarao, speaking at the second anniversary celebration of Bandhan Bank in Kolkata, also said the RBI’s interference was the “least bad decision” to check rising non-performing assets (NPAs). Also, such extraordinary powers should come with a sunset clause.

“There are problems in giving the RBI extraordinary powers because you are getting involved in the day-to-day business of banks. Also, the RBI is known for its integrity and professionalism and its integrity gets affected," he said. "It is the least bad decision. The government should have put a sunset clause, so that it becomes clear that this is an extraordinary measure."

The former RBI governor said mergers or consolidation of banks should be based on the parameter of efficiency, and SBI's merger with associate banks might not have been the most efficient one as it was without any staff cut.

Consolidation of banks was necessary to strengthen the banking system. However, certain banks must be allowed to die in the process, Subbarao said. "Consolidation should be done keeping in mind the interests of minority shareholders and to bring in greater autonomy for banks. You should have the boldness to cut the flab, reduce staff and branches.”

He said income tax collections would give an indication of the actual benefits of demonetisation. The primary objective of the note ban was to attack black money. “Income tax collection as a percentage of GDP (gross domestic product) is at 5.7 per cent at present. It should go up by one per cent this year and by 0.5 per cent a year for the next two years. Unless that happens, we can't see cost benefits of demonetisation,” he added.

RBI has identified 12 accounts, representing about 25 per cent of the gross bad loans in the banking system, which would be eligible for immediate reference for bankruptcy proceedings