Revamping RBI's Regulatory Power

Why in news?

The RBI Governor has highlighted some fundamental limitations existing in relation with RBI's regulatory power.
This comes as a response to government blaming the RBI for the recent PNB scam.

What was government's response to the scam?

The government, soon after state-owned Punjab National Bank's fraud case, accused the RBI for its supervisory failures.
It also blamed the bankers and auditors for their shortfalls.

What are the RBI's concerns?

RBI governor made mention of RBI’s warnings about possible risks, but said that the PNB’s internal systems failed to take note of it.
In response to the government's accusation, the RBI governor Urjit Patel pointed out the limitations to RBI’s power.
He highlighted the issues such as -

the absence of powers to remove the directors on the management of PSU banks who are appointed by the government
the lack of power to force a merger or trigger liquidation of a state-owned bank
the limited legal authority for RBI to hold these bank boards accountable

The government, the owner of public sector banks, still control a dominant share of the country’s banking business.
RBI Governor pointed out that the banking regulatory powers were not 'ownership neutral' in India.
This is possibly why the RBI could not fully exercise its powers to crack down on corporate governance issues at state-owned banks.
A system of dual regulation, by the finance ministry in addition to RBI, has resulted in ineffective banking regulation.
Patel urged the government to strengthen the Banking Regulation Act, 1949 to give RBI enough power to regulate PSU banks.

What is the way forward?

The RBI’s stance is valid, given the discomfort with knee-jerk reactions and the blame games since the fraud came to light.
The greater challenge is governance reform in banks.
The government should swiftly settle the issue of separation of ownership and regulatory control.
It can consider making the regulatory powers of RBI fully “ownership neutral”.
Besides, privatisation does appear to be an easy option to address some of the concerns.
But it is important to see whether such an option should be exercised during a crisis.

Source: Indian Express, The Hindu