RBI nominee on bank board only in exigency

The government is toying with the idea of incorporating provisions in the Banking Regulation Act to empower the Reserve Bank of India (RBI) to appoint its nominee on the board of a pubic sector bank (PSB) in the event of exigencies.

The consideration comes in the wake of stiff opposition to the central bank's move to withdraw its directors from banks, including those in the public sector.

Those who opposed the said move of the banking regulator "� from the ruling coalition as well as within the government "� want the bank to have its nominees on the boards of state-run banks to ensure that they carry out the government policies and do not just enter the race for profits.

The RBI nominees on the boards of Bank of Baroda, Andhra Bank and Oriental Bank of Commerce refrained from attending the meetings of the banks' boards of directors on Monday.

The nominees are believed to have stayed away as the meetings were called following the finance ministry's directive that decision to increase prime lending rates should be the domain of the boards and not of asset-liability committees of banks.

There are fears that the absence of the RBI nominees on the boards of PSBs may result in losing control of the management, and also the functioning of the banks might become purely profit-oriented, banking sources said.

In effect, those who opposed the said RBI move say the presence of the RBI nominees is required to ensure that public policies are carried out within the given parameters and banking norms.

The government is considering inserting a clause in section 36 of the Banking Regulation Act whereby the RBI will have the power to appoint a nominee on the board of a PSB in case the situation so demands. The nominee could be either an official from the central bank or an outside expert, the sources said.

The RBI has already pulled out its nominee directors from almost all the private sector banks. It has appointed observers as a transitional measure mostly in banks that are yet to fully comply with the its guidelines on ownership and governance.

However, the removal of the RBI directors from public sector banks will require legal amendment. Under the current requirement, it is mandatory for the central bank to appoint its nominees on the boards of PSBs.

Earlier, the RBI had decided to pull out all its directors from the boards of both PSBs and private banks as part of good corporate governance and as a step towards distancing itself from the functioning of bank boards.

In 2001, a consultative group was set up to strengthen the internal supervisory role of the bank boards under the chairmanship of D A S Ganguly. The decision of withdrawing the RBI directors from banks' boards was part of the Ganguly committee report.

Among other things, as a follow-up to the report, the mid-term review of monetary policy in November 2003 came up with the concept of 'fit and proper' criteria for banks' directors.

However, there is no legal provision for the RBI to insist on a 'fit and proper' status of the directors nominated by the government or elected by the shareholders to the boards of PSBs.