The RBI governor Urjit Patel has soght more legislative powers to effectively regulate state-owned banks. His plea to the Parliamentary Standing Committee on Finance to make banking regulatory powers ownership-neutral makes sense. The RBI should be able to exercise the same supervisory powers over state-owned banks as over private sector banks. The reform will enable the regulator to take legal action against any errant PSB, level the playing field between private and public sector banks and raise corporate governance. The RBI should also stop the practice of appointing its nominees on the boards of PSBs, given that there is a conflict of interest with its supervisory role. The regulator is in talks with the government on this issue, and that’s welcome. The RBI’s remit should be in charge of bank supervision, and not operations.
In its 2017 Financial Sector Assessment Programme (FSAP) of India (2017), the IMF had raised concerns over weaknesses in the independence of the RBI. The regulator, for example, does not have the powers to remove PSB directors or management, appointed by the government. It cannot force a merger or trigger a liquidation of PSBs, and also has limited legal authority to hold PSB boards accountable when it comes to strategic direction, risk profiles, assessment of management and compensation. It recommended a strategic plan for consolidation, divestment and privatisation of state-owned banks.
The RBI must exercise the powers it already has, especially that of moral suasion. It also needs to improve skill sets of its supervisors and create domain specialists with legal, banking and audit backgrounds. Lateral entry into the RBI should be encouraged to draw in the best talent for supervision. A revolving door policy can also work, if done right.