RBI should not step into day-to-day activities of banks, says Subbarao

Subbarao said RBI interference was the 'least bad decision' to check the rising NPAs in banks

Former Reserve Bank of India (RBI) governor D Subbarao on Wednesday said the banking regulator should not step into day-to-day activities of banks, as it does not have the expertise to manage a bank's business. Subbarao was referring to the May 5 ordinance amending the Banking Regulation Act, which said the central bank has the powers to suggest and even compel banks to invoke proceedings against defaulters.

Subbarao was speaking at the event of second anniversary celebration of Bandhan Bank in Kolkata.

RBI has identified 12 accounts representing about 25 per cent of the gross bad loans in the banking system that would be eligible for immediate reference for bankruptcy proceedings.

The former governor also said the RBI interference was the 'least bad decision' to check the rising NPAs in banks. He added that such extraordinary powers should come with a sunset clause.

"There are problems in giving RBI extraordinary powers because you are getting involved into day-to-day business of banks. Also, RBI is known for its integrity and professionalism and its integrity gets affected," he said. 

"It is the least bad decision. The government should have put a sunset clause, so that it becomes clear that this is an extraordinary measure," he added.

Further, the former RBI governor also said that merger or consolidation of banks should be based on the parameter of efficiency, and SBI's merger with associate banks might not have been the most efficient one as it was without any staff cut.

Also, consolidation of banks is necessary to strengthen the banking system. However, in the process of consolidation, certain banks must be allowed to die, he added.

"Consolidation should be done keeping in mind the interest of minority shareholders and bring in greater autonomy for banks. You should have the boldness to cut the flab, reduce staff and branches," Subbarao said.

Subbarao also said the actual benefit of demonetisation can only be gauged once the income tax collection as a percentage of GDP increases from 5.7 per cent to 7.7 per cent in the next three years. 

"Income tax collection as a percentage of GDP is at 5.7 per cent at present. It should go up by one per cent this year and by 0.5 per cent a year for the next two years. Unless that happens we can't see cost benefits of demonetisation," he said.