The IMF in its recent India report sought to make RBI’s regulatory and supervisory powers ownership neutral by amending relevant laws. Photo: Abhijit Bhatlekar/Mint
The IMF in its recent India report sought to make RBI’s regulatory and supervisory powers ownership neutral by amending relevant laws. Photo: Abhijit Bhatlekar/Mint

FinMin unlikely to heed RBI’s demand for greater power over PSU banks

After the govt criticised RBI for its failure to detect the PNB fraud, RBI requested the govt to stop issuing regulatory instructions applicable only to public sector banks, given that dual regulation is discriminatory

New Delhi: The finance ministry may not accede to the Reserve Bank of India’s demand for greater regulatory and supervisory powers over state-run banks. After the government criticised the central bank for its failure to detect the massive 14,356 crore fraud at the Punjab National Bank (PNB), RBI had requested the government to stop issuing regulatory instructions applicable only to public sector banks, given that “dual regulation" is discriminatory.

The central bank also said that it should be the sole regulator for banks and the regulations should be uniformly applicable to all commercial banks. It further argued that it lacked the powers to remove a weak management or non-performing directors of state-run banks.

However, a finance ministry official said that the government always takes RBI’s advice.

“The RBI has asked us to change management of state-run banks and we have done it. Then where is the question of it not having powers to remove management of state-run banks," the official said, requesting anonymity.

In response to queries in the Parliament, the government also stood its ground saying that RBI had wide-ranging powers to regulate and supervise public sector banks.

It also went on to argue that the central bank had the powers to inspect banks and its book of accounts, besides having a nominee member on the board and is part of the committee that approves large loans.

It can not only appoint additional directors on the banks’ boards, but even the appointments of whole-time directors are made in consultation with RBI, the centre told the Parliament.

It has a repository for all large credit exposures as well as a central fraud registry where banks report all frauds above 1 lakh, besides having powers under the foreign exchange management act, it added.

Last week, in its annual assessment of the Indian economy, the International Monetary Fund had sought to make RBI’s regulatory and supervisory powers ownership neutral by amending relevant laws.

“Staff encourages the authorities to follow up on the FSAP (financial sector assessment programme) recommendations, including to amend the legal framework to provide RBI full regulatory and supervisory powers over PSBs to make banking regulation and supervision ownership-neutral," the IMF said, adding: “The recent large fraud at Punjab National Bank underscores the importance of steps needed to improve PSB governance and internal controls."

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