RBI asks ministry not to micromanage banks

Governor Duvvuri Subbarao says government must exercise ownership only through board for corporate governance

The uneasy relationship between the finance ministry and the Reserve Bank of India (RBI) came out in the open yet again, with RBI Governor D Subbarao questioning the way the government played its ownership role vis-à-vis the principles of corporate governance.

“There are questions about how the government will play out its ownership role. Occasionally, there are concerns over the government exercising its ownership rights not through the established channel, which is the board mechanism, but outside of the board. I don’t think it is a good example of good corporate governance.”

Subbarao emphasised the government should exercise its ownership only through the board. 

TURF WAR

• RBI opposed to ministry move to have independent debt management office
• RBI was against the FM heading Financial Stability & Development Council but ministry intention prevailed
• The ministry overruled RBI concern on bank investment in commodity derivatives

The ministry’s diktats

• Cap share of bulk deposits in total
• Except six big banks, others must form consortium to lend more than Rs 150 cr
• Raise EMI tenure, not EMI amount

Though the government is the majority shareholder in public sector banks, has representatives on boards and also participates in the appointment of top management, the mandate to regulate financial institutions rests with the central bank, which also plays the role of the banking regulator.

“One thing for the government could be to show exemplary behaviour of corporate governance and exercise ownership rights through the board. I think that would be good for all financial institutions,” Subbarao said at a function here to mark the 30th foundation day of the National Bank for Agriculture and Rural Development (Nabard).

There have been recent instances when the finance ministry issued directions and norms to the banks that is the role of the regulator. One such example was when the ministry did not allow banks to venture into areas other than core banking activities like insurance and mutual funds. This was on the grounds that banks should use their capital only in core activities. In addition, the finance ministry has also issued norms regarding consortium lending — an activity that falls under the central bank's purview.

Subbarao said there was anecdotal evidence pointing to the diversion of government-subsidised agricultural credit to other purposes. “It is not clear if the credit shown as lent to farmers is actually going for agriculture,” he said.

Subbarao said he observed the trend during recent visits to some bank branches in different parts of the country.

Therefore, there was a need to modify the interest subvention scheme under which the government subsidised the interest cost for agricultural loans and to tighten the end-use factors while granting credit, he said.