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Business News/ Opinion / Online-views/  An eight-point agenda for RBI
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An eight-point agenda for RBI

On its completion of 80 years, here is a list of eight things which I would love to see the central bank do in the next couple of years

Photo: BloombergPremium
Photo: Bloomberg

India’s central bank has completed 80 years. At a function in Mumbai on 2 April, the Reserve Bank of India’s (RBI) 23rd governor, Raghuram Rajan, dwelt on the significance of the anniversary, referring to the south Indian tradition of Sadabhishekam, where one celebrates 80 years after seeing the full moon 1,000 times. Prime Minister Narendra Modi too found the occasion special as the RBI has been blessed with Sahasra Chandra Darshan.

For a central bank, 80 is a relatively young age. Sveriges Riksbank or Riksbanken, Sweden’s central bank, was founded in 1668. The world’s oldest central bank, however, got the exclusive right to issue bank notes much later, in 1897.

The second oldest central bank, the Bank of England, formally Governor and Company of the Bank of England—the Old Lady of Threadneedle Street—was founded in 1694. A year later, Governor and Company of the Bank of Scotland was founded. The list of global central banks older than the RBI is long and it is pretty obvious that the Indian central bank will see many thousand full moons in its lifetime.

Modi spoke about achieving 100% financial inclusion in the next 20 years when RBI turns 100. On its completion of 80 years, here is a list of eight things which I would love to see the central bank do in the next couple of years.

1) Free bank licensing: Give as many licences as it finds “fit and proper" among those who apply for licences. When the existing banks are finding it difficult to expand their assets for lack of capital, allow new entrants who have the capital to set up banks; intensify competition. Allow a few of them to fail. The system is robust enough to accept a few failures.

2) End discretion-based rules: Currently all fit and proper applicants are not entitled to get bank licences. Similarly, some of the private bank promoters could delay shedding their stakes as much as they can. These are only a few of the instances where the RBI neither follows rules nor principles. Please put an end to these discretion-based norms.

3) Ensure consumer protection: Many Indian banks follow the principle of giving the advantage of new low loan rates to new borrowers while old borrowers continue to pay higher rates. Banks are saddled with bad assets and since they need to set aside money for such assets, they deprive the benefit of low lending rates to their borrowers. Why penalize borrowers for banks’ inefficiency?

4) Withdraw RBI nominees from all bank boards: Enough has been written on this in the past. Why should a regulator be on a public sector bank’s board? The government, being the majority owner of public sector banks, should be there, but there is no room for RBI nominees. Also ensure that the banks get the right kind of professionals on their boards who can guide them and lend strategic vision for the business to grow.

5) Withdraw from selection process of bank CEOs: Here too, the RBI should excuse itself. The appointment process of public sector bank chiefs is the least transparent and nobody knows how the CEOs are selected. The RBI should wash its hands of the process and let an independent board decide on selection of the bank bosses. It is needless to say that if the RBI wants competent professionals at the top, it must allow the banks to offer market-related compensation to their chiefs.

6) Sack inefficient CEOs: The RBI is now empowered to remove a CEO and even the entire board of a bank, but there has not been a single instance where it has exercised its powers. In the recent past, it had recommended dissolution of the board of a Kolkata-based bank but when the finance ministry expressed its unwillingness to back the move, the RBI kept quiet. Currently, if a bank chairman is not found competent enough to run the show, the government does not renew the term even if the person is below 60, the retirement age. There have not been too many such instances though. The RBI should take the initiative and show the door to some of the lazy bankers and incompetent boards.

7) Remove subsidies from loans: It took a little more than three months and two rate cuts by a quarter percentage point each to nudge the commercial banks to cut their loan rates by roughly one-third of the policy rate cut. If indeed RBI wants to ensure transmission of monetary policy, among other things, it must iron out the distortions in the form of subsidies from the banking system. Farm loans are given at 7% with the government making a provision in the Union Budget to subsidize such loans. Those farmers who repay bank loans regularly can raise fresh loans even at a cheaper rate. How will monetary policy decisions transmit in the system if we have such distortions?

8) Make minutes of RBI board meetings public: We do not know what happens at the RBI board meetings. Once a year, after presenting the Union Budget, the finance minister addresses the RBI board in Delhi and a press conference is held where the finance minister and the RBI governor speak. We do not know what happens at the board meetings round the year; the views of its illustrious board members on inflation, interest rates or even banks’ pile of bad assets. We would love to know what happens at the RBI board meetings. If the Bank of England can make it public, why can’t the RBI do so?

In his speech on 2 April, governor Rajan said: “Strong national institutions are hard to build. Therefore, existing ones should be nurtured from the outside, and constantly rejuvenated from the inside, for there are precious few of them."

These suggestions are for its nurturing and rejuvenation. I will be happy to see if RBI finds at least some of them worth trying out.

Tamal Bandyopadhyay, consulting editor of Mint, is adviser to Bandhan Financial Services Pvt. Ltd, India’s newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck.

Respond to this column at bankerstrust@livemint.com

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Published: 13 Apr 2015, 12:15 AM IST
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