The government is reported to be against the Reserve Bank of India (RBI) withdrawing its nominees from the boards of public sector banks. This is unsound. RBI is in charge of bank supervision and regulation, and, therefore, should not be party to the banks’ decisions. Having RBI nominees on bank boards is like deputing officers of Comptroller and Auditor General of India as nominees on the board of each and every public sector company that it audits. That’s absurd, given the clear conflict of interest in the twin roles.
The regulator cannot become part of the regulated entity. So, RBI’s rationale that withdrawing its nominees from PSU bank boards would avoid conflict of interest is sound. The P J Nayak Committee to review governance on bank boards had endorsed the principle that RBI as the regulator and supervisor of banks should not be on bank boards. The RBI nominates a director to each bank and where banks are troubled or raise special concerns, it could nominate more than one director. The government wants RBI’s nominees — who could either be serving or retired RBI officers having domain knowledge of bank regulation or supervision —to continue on boards as PSBs have been hamstrung by bad loans and poor governance practices.
The Nayak Committee had also held that RBI nominees could have a salutary impact on an imperfectly constituted board as they carry weight with non-official directors. However, retaining them would compromise the basic principle that regulators should not be on bank boards. That is unacceptable. The need is to raise the standard of bank boards, and to fix their governance ills.
They must be ring-fenced against political interference. This calls for systemic reforms. One way is to create a holding company for all PSBs, with aprofessional board that would select the boards of individual banks, create remuneration structures that incentivise efficiency and accountability, and insulate them from political and bureaucratic interference. RBI nominees would step down, automatically.