NO RBI NOMINEE SHOULD BE ON PSB BOARDS: PATEL
RBI governor seeks more powers to effectively regulate state-owned banks
Reserve Bank of India (RBI) Governor Urjit Patel on Tuesday made a strong case for more powers to effectively regulate public sector banks (PSBs) as lawmakers asked him tough questions over increasing bad loans and frauds.
According to sources, Patel also informed the Standing Committee on Finance that the RBI is in communication with the government for discontinuing the practice of appointing RBI nominees on boards of PSBs to avoid to any conflict of interest between the regulator and regulated entities.
Patel was asked about bad loans, bank frauds, cash crunch and other issues, said sources.
They also said he assured the panel members that steps were being taken to strengthen the system.
Regarding PSBs, Patel told the panel that the RBI has “inadequate” control over them and asked for more powers to regulate them.
The RBI has cited at least 10 areas where it has no control over PSBs. These include power to remove chairman, director or chief executive officer (CEO) of state-owned banks and impose restriction on common directors on PSB boards.
There are 21 state-owned banks, including State Bank of India. The gross non-performing assets (NPAs) or bad loans of PSBs stood at ~7.77 trillion at end-December 2017. The total NPAs of all banks (including private) was a whopping ~8.99 trillion.
Patel also told the panel, headed by veteran Congress leader M Veerappa Moily, that there should be no central bank nominee on the boards of PSBs, sources said.
The central bank, he said, was discussing the matter of the RBI nominee director with the finance ministry. He categorically said that the primary and collective responsibility to contain frauds in the banks rests with its board, according to sources.
Emphasising on the director’s role, Patel in a written reply to the panel said the main role of a director on the bank’s board, including the nominee director, is to ensure that the bank is managed efficiently and professionally, sources said.
Patel was asked questions regarding governance issues in ICICI Bank and Axis Bank.
The proposals coming before the board and its committees are consistent with normal banking practices, guidelines of the government, the RBI and are not violative of any law, he said.
“The RBI nominee directors should be distanced from management committee of the board (which takes credit decisions), to avoid any conflict of interest and the RBI nominee should not be on the boards of the PSBs,” he noted.
Sources further said the RBI governor also answered queries regarding the $2 billion fraud allegedly committed by diamantaire Nirav Modi and his associates at Punjab National Bank.
According to sources, Patel said it was impossible to look after each and every branch of a bank in terms of an audit.
He further said that the separation of the post of chairman from that of the CEO/managing director, in the nationalised banks, has been done with a view to strengthening the independence of the board and enhancing its oversight over the management.
Highlighting the need for implementation of the Nayak Committee report, he said it will go long way in improving role of the boards of the nationalised banks.
Sources further said that some members of the committee sought to know about the reasons for recent instances of ATMs running out of cash and why enough steps were not taken to tackle banking frauds.
Patel told the panel that steps were being taken to strengthen the banking system. “We are confident that we will be able to tide over the crisis,” a source quoted the governor as saying with respect to the NPA situation.
On an optimistic note, he said, Patel informed the committee that after implementation of the Insolvency and Bankruptcy Code, the situation on the NPA front has been improving.
Sources also said panel members put questions to Patel about final amount of the cash returned to the banking system after demonetisation, but they did not get a satisfactory answer.
The RBI governor also said that the revised framework for NPA identification issued on February 12 would provide sufficient time to banks to put in required resolution plan.
“Thus, the revised framework seeks to shorten the time period between manifestation of a financial distress in a borrower and decisive action to resolve the same,” he said in a written reply.