The PJ Nayak-led panel on governance of bank boards has recommended that public sector banks should be answerable only to the RBI, and not to both RBI and the Finance Ministry as is the case now. This would provide a level playing field for state-owned banks vis-à-vis their private sector counterparts, the panel said.
"All regulatory functions of the Government need to be moved forthwith to RBI, freeing the public sector banks of dual regulation,” the committee said in its report.
The government periodically issues instructions to public sector banks, which have to do with regulations, as well meeting social objectives.
In July 2012, the government had written to the CEOs of all scheduled commercial banks, public sector financial institutions and public sector insurance companies ‘may consider’ uniform card rates for bulk deposits for different maturities at least up to one year, so as to create a ‘level playing field’ for all banks. The circular warned that failure to do so would be treated as a violation of the government’s instruction.
"The circular acts at cross-purposes with the regulatory regime of deregulated interest rates which RBI has established. In effect the government becomes a second regulator, with little sensitivity to whether its directives are consistent with RBI regulation,” the report said.
Last October, the Finance Ministry had asked public sector banks to offer cheaper loans for customers wanting to buy automobiles and consumer durables, in an effort to boost demand in the economy.
But even more damaging was the interference by the Finance Ministry in 2008 when it asked PSU banks to waive off Rs 76,000 crore worth of outstanding loans to farmers.
"Any directions issued which are applicable to a subset of banks (PSU banks in this case) do damage to that subset, however laudable the objectives. Those banks not part of the subset (private sector banks in this case) are under no obligation to participate; if they do so the participation is voluntary, while for the subset it is coercive,” the committee said in its report.
The panel said that for the government to issue other instructions in pursuance of development objectives solely to public sector banks was discriminatory and anti-competitive.
"If the tasks are indeed laudable, they should be laid down for implementation by all banks. The straightforward way of doing so is to route it through RBI,” the report said
