caalley logo

The alley for Indian Chartered Accountants

Will RBI devise rules to regulate public sector banks amid rising scams

New Delhi, December 5, 2022 

This has obviously made things lopsided when it comes to governance of Indian banks. For instance the Reserve Bank of India (RBI) can issue guidelines to private banks or foreign banks, but not to the PSBs. This anomalous duality may well be under review now with a course correction on the anvil. Can the Standing Committee on Finance provide answers to this conundrum?

A throwback to this anomaly is when former RBI Governor Urjit Patel in a speech titled 'Banking Regulatory Powers Should Be Ownership Neutral' in March 2018 threw into stark relief that though the RBI is the banking regulator, the powers to regulate PSBs are held by the government.

The government of India regulates PSBs under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; the Bank Nationalisation Act, 1980, and the State Bank of India Act, 1955.

Patel had averred that Section 51 of the Banking Regulation Act (1949) distinctly states that the RBI does not have powers on critical aspects of governance in the PSBs.

These are: The RBI cannot remove chaipersons, managing directors or directors of a PSB; the central bank cannot force a merger or liquidation in the case of the PSBs; the PSBs neither require licence from the top bank nor can it revoke their licence. Seized of this matter, action is being contemplated to correct this aspect of regulation and governance.

However, in July 2018, the government had informed parliament in a conflicting statement that RBI has wide-ranging powers to regulate and supervise public sector banks.

The government's statement countered RBI's position that the central bank lacked powers to regulate PSU banks, including dismissing banks boards and the management.

In response to a query in the Rajya Sabha, the Centre had stated: "Powers of the RBI are wide-ranging and comprehensive to deal with various situations that may emerge in all banks, including public sector banks. RBI has powers to inspect the bank and its book of accounts, has a nominee member on the board of state-run banks and is part of a committee within the board that approves large loans.

"RBI can appoint additional directors on the banks' boards... RBI has a repository for all large credit exposures as well as a central fraud registry where banks report all frauds above Rs 1 lakh. It also has powers under the foreign exchange management act."

Despite a flourishing private sector banking space, the bulk of banking assets in India are with public sector banks which are under the Department of Financial services aegis.

Many public sector bank scams have been unearthed over the years which have led experts to question duality of control.


Read more on:
Don't miss an update!
Subscribe to our newsletter