The government is not favour of the Reserve Bank of India’s suggestion seeking to withdraw the banking regulator’s nominee directors from the boards of public sector banks. The finance ministry feels that the presence of RBI nominees improves the working of boards of PSU banks, and their withdrawal may not be appropriate at the current juncture as state-owned banks were stressed with rising bad loans and depleting profits, a government official familiar with the matter said.
While proposing sweeping changes in the functioning of PSU banks through more decision-making powers to banks’ boards, a developmental and coordinating role for the Department of Financial Services, the RBI Governor Raghuram Rajan on Tuesday suggested withdrawing its representatives from the banks’ boards.
“RBI would perform a purely regulatory role, and withdraw its representatives on bank boards — this will require legislative change. Over time, RBI should also empower boards more, for instance offering broad guidelines on compensation to boards but not requiring every top compensation package be approved,” Rajan had said.
Existing laws will have to be amended for allowing RBI to withdraw it nominees on banks’ boards. The RBI, for instance, is required to nominate one director on the board of State Bank of India according to Section 19 (f) of the SBI Act, 1955. RBI Deputy Governor Urjit Patel is currently the central bank’s nominee director on the board of SBI. Government, the largest shareholder in PSBs, also appoints its nominees on the boards.
“In light of the asset quality review initiated by the RBI, the time may not be right to implement this (suggestion of withdrawing directors,” the government official said. Expert committees on banking sector reforms have earlier argued that RBI nominees should not sit on the state-owned banks’ boards. This is because of the apparent conflict of interest between a regulator also sitting on the board of an entity that it regulates.
In its report in May 2014, the PJ Nayak-led committee which reviewed governance of boards of banks in India, recommended that the RBI should withdraw its directors from the boards of public sector banks. “RBI directors should step down from bank boards during Phase 3 of the transition process, unless a bank is troubled or raises special concerns,” the committee said. The Narasimham committee on banking sector reforms in the 1990s too recommended the RBI should relinquish its seats on the board of the banks.
The government earlier this year set up a Bank Board Bureau (BBB) to make top level appointments in the PSU banks – in line with the suggestion of Nayak panel. Rajan had suggested the government should completely empower the BBB to make appointments at the banks.
Though the BBB has taken over part of the appointments process in public banks, there are two ways the government still plays a role. “First, the final decision on appointments is taken by the Appointments Committee of the Cabinet. Second, appointments of non-official directors onto bank boards still lie outside the BBB. As the BBB gains experience, it would make sense to allow these decisions also to be taken by it,” Rajan said. #casansaar (Indian Express)
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