MUMBAI: The Reserve Bank of India has told the government that the banking regulator should have the final say when it comes to resolving financial crisis at banks, even if they are state-owned. The central bank has pointed out this in a discussion paper, Management and Governance Issue in Public-Sector Banks, prepared in March. Public sector banks account for 70% of the nations deposits and loan market. The government, being the majority shareholder, appoints the senior cadre — chairman and managing director as well as executive director — at these banks and often directs them on operational issues. Regulation should prevail ownership, the RBI has written in the document prepared for debate and discussion. This means the decision taken by the banking regulator should prevail even if the government has a different plan. The proposal comes at a time when the government has been infusing equity capital at a regular basis in state owned banks to improve their financial health. Regulation should prevail over ownership at government banks: Reserve Bank of IndiaAn instance where the differences between the government and RBI have come out in the open was on how to deal with loss-making United Bank of IndiaBSE 3.14 %, a government owned bank. After the Kolkata-based bank reported a sharp rise in bad loans leading to the exit of CMD Archana Bhargava in February, the RBI wrote to the finance ministry on the need to supersede the banks board. Superseding here means the board would be dissolved and the RBI would have the right to appoint an administrator to run the bank. This suggestion, however, did not go down well with the government and status quo remained. According to the RBI, the regulator, and not the government, should decide the fate of a financial institution. Since regulation has to be ownership neutral, whatever rules apply to private banks should apply also to public sector banks, it said. Since the government has a say in the appointment of the board members of a bank, corporate governance practices vary between public sector and private banks, despite both being regulated by the RBI. For instance, unlike state-run banks, private lenders need to follow the Ganguly committee recommendations on corporate governance and their chief executives are appointed based on the principles of fit and proper.
Posted on: Sun, 18 May 2014 09:13:04 +0000
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