Process of selecting new banking licenses should remain credible, says EAS Sarma
Former union government secretary EAS Sarma has written a letter to Reserve Bank of India and Department of Economic Affairs, which drew attention to Moneylife article by Ramesh Arunachalam on areas of conflict of interest in the way RBI is processing new private banking licences
Considering the importance of the financial sector, in general, and the crucial role of the RBI (Reserve Bank of India) in particular, Mr EAS Sarma, former union government secretary believes that MoF (Ministry of Finance) and RBI should jointly address the issues raised by Mr Ramesh Arunachalam in his article in Moneylife to ensure that the process of selection of applicants for new banking licenses remains credible in public perception.
You may read Arunachalam’s article here:
Does the RBI know how much conflicts of interest it has created?
Mr Sarma has written a letter to RBI and Department of Economic Affairs (DEA), which drew attention to the Moneylife article by Ramesh Arunachalam on areas of conflict of interest that arise in the way RBI allows new private banks into the sector.
Mr Arunachalam's concerns, according to Mr Sarma, may be summarised as follows.
The question of new banking licenses being issued to private agencies is at present under the consideration of the Parliament. The Parliamentary Standing Committee on Finance has expressed reservations against issuance of licenses to corporate houses. RBI should have awaited the final outcome of this, instead of rushing into constituting a panel to set into motion the licensing process.
The above concern equally applies to the financial inclusion committee constituted by RBI under the chairmanship of Nachiket Mor. That committee whose term runs parallel to that of the banking license advisory panel could also await the discussion in the Parliament.
Several members of the banking license advisory panel have direct and indirect linkages with agencies which are associated with banking institutions or likely to be aspirants for banking licenses in the coming months, thereby implying a possible conflict of interest that might erode the credibility of the Bimal Jalan panel. Arunachalam has cited specific cases that might involve a conflict of interest.
When the government eloquently argues for all kinds of “reforms”, Sarma wonders why the changes that he has referred to in his letter, which are well within the reach of the government, are never considered! Other issues raised by Sarma in his communication to DEA and RBI include:
Section 35 of the Banking Regulation Act 1949 empowers RBI to inspect the banking institutions. The RBI Act itself empowers the central bank with statutory powers in other areas. In such a scenario, it is somewhat anachronistic that a deputy governor of RBI should sit on the Board of Directors of SBI and oversee its management. No doubt Section 19(f) of the SBI Act requires such an involvement but, certainly, it gives rise to a serious conflict of interest for the RBI which, by virtue of that provision, is drawn into the day-to-day decision making processes of SBI. Section 19(f) of the SBI Act should perhaps be deleted and RBI should insulate itself from the management of SBI.
Section 8 of the RBI Act lays down criteria and modalities for constituting its Central Board. Obviously, the selection of the members of the Central Board should not be in conflict with RBI's own role as a regulator under the other statutes such as FEMA. For example, under Sections 6 & 47 of FEMA, RBI has the authority to frame rules and regulations. Under Sections 11 & 12 of FEMA, RBI has the authority to inspect and impose penalties on violations of that law. Against this background, there were embarrassing occasions in the past when the names of persons facing FERA (predecessor to FEMA) violations had come up for their inclusion in the central board! We have now a new situation in which some of the members of the central board may have a direct or indirect stake in the new banking licenses to be issued. Unfortunately, the selection of the members of the Central Board of RBI has remained a subject of political patronage. Often, it is the PMO (Prime Minister’s Office) which calls the shots. For the sake of RBI's credibility, should this not be avoided scrupulously?
There is the wider question of MoF's (Ministry of Finance) officers sitting on the boards of PSU (public sector units) banks. There is a clear conflict of interest in this. Even if the government, as the owner of the PSU banks, is entitled to have its nominees on their boards, a better way is to nominate professionals who have no role in the day-to-day functioning of the Ministry and who can contribute objective professional inputs. In a way, this is a question that is relevant not only for the PSU banks but also for all central PSUs. There is an urgent need to introduce fundamental changes in the way PSU boards are constituted, considering that we may have to live with the PSUs for decades to come.