: The law that regulates and supervises banking companies in India does not wholly apply to State Bank of India (SBI), other government-owned lenders and regional rural banks (RRBs), a senior Reserve Bank of India (RBI) official told ET.
This follows RBI governor Urjit Patel’s March 14 comment that the regulator didn’t have as much control over state run banks as it did over private ones in the context of the fraud at Punjab National Bank.
“Only certain provisions of that Act are made applicable to such banks through Section 51 of the Banking Regulation Act, 1949,” said the person cited above, elaborating on the powers that RBI has over private banks but not over state-run ones. Separate items of legislation apply specifically to SBI, state-owned lenders and RRBs, the person said.
The government does not share the RBI’s assessment, ET had reported last week. It feels barring supercession of boards, RBI is well equipped and needs to use powers available.
Unlike in the case of private banks, RBI does not have the powers to remove chairmen and managing directors, grant licences and impose conditions on government-owned banks, said the person cited above. It also does not approve the appointment, reappointment or termination, and remuneration of the CMD and directors, of government-owned banks.
RBI has the power to call a meeting of a non-state bank’s directors, get one or more of its officers to attend board meetings, appoint observers and ask the lender to make changes in management. It can remove managers and other executives from office, supersede the board, move to wind up the lender and sanction schemes of voluntary amalgamation.
These powers are not available in the case of state-owned banks under the Banking Regulation Act, 1949. Only Section 51 of the Act applies to them. “From the RBI’s standpoint, legislative changes to the BR Act that make our banking regulatory powers fully ownership neutral — not piecemeal, but fully — is a minimum requirement,” Patel said last week.
Patel had delved into the “root cause” of frauds such as the one that has rocked Punjab National Bank. He had compared the powers RBI has over private sector banks and public sector lenders as he sought parity.
“This forms a great constraint, as a regulator and supervisor without effective legal teeth cannot command adequate respect, authority, or obedience from the regulated entities,” said a sector expert who did not want to be identified.
ET reported last week that the government feels the RBI has enough powers under the Banking Regulation Act to take action against errant bankers in the aftermath of the PNB scam and mounting bad debt. It is of the view that RBI needs to exercise these powers. The finance ministry has identified 13 sections in the Banking Regulation Act under which the central bank has powers to take action against errant public sector lenders.
Former RBI governor C Rangarajan, at a recent event, said the RBI has supervisory powers but it consults finance ministry before taking any action… because government is the owner of the PSU bank.