Is the RBI monitoring the financial sector well?

Given the long period over which United Western Bank was allowed to go from bad to worse, the RBI's supervisory role is under question.

K V KRISHNAMURTHY,
Former CMD of a large PSU bank

The RBI never makes public the reasons for delayed decision-making and the absence of transparent rules.

Globally, the regulators of any statutory body follow the highest standards of procedural, ethical and transparent methodology and openness. Financial sector regulators are no exception. However, the actions and the behaviour of the country's financial sector regulator, the RBI, cannot always be predicted.

The RBI will demand transparency, accountability, speed and efficiency from regulated entities although it does not practice what it preaches. Imposing moratorium on United Western Bank is a recent example where important stakeholders like depositors, customers and employees suffered, but the bulls in the stock market are running amok, reaping profits on the institution, bulldozed by the regulator. In the name of privilege and secrecy, RBI never makes public the logical reasons, if any, for the inordinate delay in decision-making and the absence of transparent rules and procedures.

Many in the banking system privately discuss the unreasonableness of the regulator's delay, whimsical actions, and so on. But they do not talk openly. The regulators frame rules on capital requirements, fit and proper criterion, rules for efficient running of business, and so on. Whether these are complied with,or assurances given about compliance, we should not doubt the integrity and the commitment of the institution. Globally, the regulators function without fear, favour, bias or prejudices and follow transparent rules and procedures. Can the same be said about our regulators?

The small stakeholders in this small but otherwise good bank today feel cheated and destroyed. The discrimination of big banks is well-known. They are fond of branding everything. They brand customers as "ordinary", "privileged", "silver", "platinum", "gold" and so on. They rate snobs highly and shower them with privileges while humble and simple common men are left humiliated. The common man's comfort is always with the small bank. It is time for the regulator to look at "ordinary" mortals who are comfortable, happy and confident only about their own small and sincere institutions.

Without anyone resorting to "Gandhigiri", will the regulator show compassion, kindness, transparency and fairness in all its actions to help the small, and beautiful private and public financial institutions thrive in our country? Only then will the RBI become the best regulator in the world. People of our country are basically timid, non-violent and have immense faith in God, destiny and fate. It is high time the public started practising Munnabai's "Gandhigiri" and made the regulator sensitive towards the common man. RBI must take "prompt corrective action" in clearing the mess in the financial sector. It should not delay and look for a political solution which it possibly did for United Western by choosing another Mumbai-based bank as its rescuer.

K CHERIAN VARGHESE,
former chairman, Union Bank

The last time depositors got hurt in a bankruptcy was in the early '60s "" that's a great record for any central bank to have.

Unlike in several other countries, bank failures have been very insignificant in number, and magnitude, in India. The last instance of depositors suffering a partial loss on account of bankruptcy in a bank was in the first half of 1960s. This is a commendable record for the central bank of the country.

To many it may appear that United Western Bank reached the trigger point of moratorium all of a sudden, thus raising the debate about the monitoring of banks by the central bank.

RBI has a fairly robust monitoring mechanism for banks. Over the years the central bank has moved from a strict regime of controls to a well-designed system of regulation. Off-site surveillance has been introduced as the RBI inspection may take place only once in a year.

The DSB returns introduced by RBI provide abundant information about the functioning of a bank. Such information is collated, peer group comparisons on important parameters are made and sent to banks with direction to place it to the Board.

The RBI holds periodical discussions with the CEO and the top management of banks to understand the various developments in the bank and to assess the quality of management on an on-going basis.

Banks are required to submit to the central bank a self-assessment of the risk profile under different specified areas and the direction of movement of risks at quarterly intervals. The management has to place such reports to the Board. The RBI also asks appropriate questions to keep the management and the Board alert.

Based on the RBI's inspection each bank is rated on the Capital adequacy, Asset quality, Management, Earnings, Liquidity and Systems (CAMELS) model. The findings of the inspection, including the rating, is required to be placed to the Board along with a plan of action to rectify the deficiencies.

The RBI holds a detailed discussion with the CEO and the top management on the findings and the minutes are also required to be placed for the Board.

Before a bank becomes terminally ill ,the RBI sounds enough alarm bells to alert the Board and the management. The Board is given adequate opportunity to take corrective action. Hence, the RBI is not high-handed in its approach.

If a bank fails despite such monitoring, leading to a declaration of moratorium, the blame should not be put on the RBI's shoulders, but on the shoulders of the Board and the management of that bank.

In most cases of moratorium, the RBI has successfully brought in a knight to save a failed bank, in the interest of the depositors.But this pattern should not be taken for granted. It is about time that customers learn to differentiate between banks and do not put their savings blindly into any institution carrying the tag of a "bank".

The RBI is not the owner of banks, it is only a regulator. It has been playing it role well and it is time the owners also play their role equally well.