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India’s bank-dominated financial sector has often been in the news for wrong reasons. The nub of the problem is that sometimes financial statements of intermediaries conceal rather than reveal. The consequent delay in identifying a problem leads to crises. Different stakeholders in the system, from regulators to citizens using RTI, have tried to ensure greater transparency. However, this is an area where the needle doesn’t seem to budge despite Supreme Court interventions.
Almost six years after the Supreme Court first ruled in favour of more transparency, the issue is back at the same forum. While the final verdict will be reached in due course, there are some overarching principles at stake. First, it’s not a privacy issue. Everyone is entitled to the same level of privacy as provided by the law. What is at stake really is the nature and extent of disclosures that banks are mandated to make in larger public interest.
A bank is an intermediary. Its raw material is the deposits raised from the public. Therefore, to safeguard deposit holders and the financial system, RBI has stringent regulatory requirements. To illustrate, most NBFCs, or shadow banks, are not allowed to raise public deposits. A tool that heads off a systemic crisis is a bank’s financial statements and attendant disclosures. Sometimes, banks fail to meet prescribed standards, forcing the regulator to step in. In April 2017, RBI asked banks to make a public disclosure if the central bank’s estimate of NPAs exceeded their own beyond a threshold. This was done because there were instances when banks’ financial statements did not reflect the true picture.
Transparency norms keep evolving according to circumstances. Yes Bank’s case provides a clue. A mere six months before RBI declared a moratorium on its operations in March 2020, it was declaring a net profit. Clearly, there was a material mismatch between its financial statements and the true state of affairs. Therefore, there’s a case for the regulator to mandate more disclosures from its annual inspection report of banks without compromising on the privacy of individual accounts.
This piece appeared as an editorial opinion in the print edition of The Times of India.