There is complete removal/weak RBI powers on corporate governance at PSBs-RBI Governor

There is  complete removal/weak RBI powers on corporate governance at PSBs. No Banking Regulator Can Catch or Prevent All Frauds-RBI Governor

Banking Regulatory Powers Should Be Ownership Neutral

RBI Governor, Shri Urjit Patel in his speech at the Gujarat National Law University (GNLU) in Gandhinagar has stated that there has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it. He added that it is simply infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by “being there”. He stressed on various mechanisms should be in place to deter frauds and other irregularities.

The RBI Governor highlight some fundamental fissures that exist in the regulation of banks, in particular, public sector banks (PSBs). He underlined that Banking Regulatory Powers in India are NOT Ownership Neutral. he explained that Aal commercial banks in India are regulated by the RBI under the Banking Regulation Act, 1949. Additionally, all public sector banks are regulated by the Government of India (GoI) under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; the Bank Nationalisation Act, 1980; and the State Bank of India Act, 1955. Section 51 of the amended BR Act explicitly states which portions of the BR Act apply to the PSBs.

He stated that the most common thread across the omissions is complete removal or emaciation of RBI powers on corporate governance at PSBs as under:

1. RBI cannot remove directors and management at PSBs as Section 36AA(1) of the BR Act is not applicable to the PSBs.

2. Section 36ACA(1) of the BR Act that provides for supersession of a Bank Board is also not applicable in the case of PSBs (and regional rural banks or RRBs) as they are not banking companies registered under the Companies Act.

3. Section 10B(6) of the BR Act that provides for removal of the Chairman and Managing Director (MD) of a banking company is also not applicable in the case of PSBs.

4. RBI cannot force a merger in the case of PSBs as per Section 45 of the BR Act.

5. PSB’s banking activity does not require license from RBI under Section 21 of the BR Act; hence, RBI cannot revoke a license under Section 22(4) of the BR Act as it can in the case of private sector banks.

6. RBI cannot trigger liquidation of PSBs as per Section 39 of the BR Act.

7. Furthermore, in a remarkable exception of sorts, in some cases there is duality of Managing Director and the Chairman – they are the same – implying the MD is primarily answerable only to himself or herself.

He went on to state that this legislative reality has in effect led to a deep fissure in the landscape of banking regulatory terrain: a system of dual regulation, by the Finance Ministry in addition to RBI.

Download Full Speech of RBI Governor Click Here >>