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.
As per sources, Patel also informed the Standing Committee on Finance that the RBI is in communication with the government for discontinuing the practice of appointing the central bank’s nominees on boards of PSBs to avoid 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 banking 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 ten areas where it has no control over PSBs. The central bank has no powers to remove chairman, director or CEO of state-owned banks and also cannot impose restriction on common directors on PSB boards, among others.
Sources said committee member Nishikant Dubey observed that the Banking Regulation Act empowers the RBI to inspect and supervise commercial banks as well as monitor financial institutions based on internationally adopted CAMEL model. It focuses on capital adequacy, asset quality and other aspects. “I don’t think there is any need of extra powers for the RBI,” Dubey reportedly said in the meeting.
There are 21 state-owned banks, including State Bank of India. The gross non-performing assets (NPAs) of PSBs stood at Rs 7.77 lakh crore at end-December 2017. The total NPAs of all banks, including private ones, was
a whopping Rs 8.99 lakh crore.
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, Patel said, was discussing the matter of RBI nominee director with the Finance Ministry. He categorically said the primary and collective responsibility to contain frauds in the banks rests with their respective boards, according to the sources.
In a written reply to the panel, Patel said the main role of directors on a bank’s board, including nominee directors, is to ensure that the bank is managed efficiently and professionally, as per sources. Patel was asked questions regarding governance issues in ICICI Bank and Axis Bank.