The Uneasy Truce between the Central Bank and the Government

On June 8, 2017, I had written a piece on LinkedIn The Uneasy Truce between the Central Bank and the Government where I had explained how Raghuram Rajan had become the sacrificial goat in the ongoing conflict between the Reserve Bank of India and the Government especially on the issues of Monetary Policy and interest rates.

But now it seems that while Dr. Urjit Patel seemed like the ideal and most pliable candidate to make peace with the Government, the uneasy truce seems to continue on important policy matters. This has been brought to light largely because of the PNB Scam involving Nirav Modi.

The Nirav Modi scam, fortunately, questioned the role of the Central Bank and what it was doing to prevent scams of the nature of the PNB-Nirav Modi nexus. Then came the startling revelation that the RBI has little or no governing power over public sector banks. Not even the powers to sack anyone on the Board of Directors for incompetence or misconduct. This is indeed shameful. In view of the fact that more and more scams are being revealed post-Nirav Modi.

But the Bank Boards Bureau ( BBB ) led by former Comptroller and Auditor General Vinod Rai statement that the government has been ignoring the recommendations of the BBB for greater dialogue over a restructuring of the public sector banks is a final blow in the continuing conflict between the government and the banking regulators. The BBB’s statement supports Dr. Urjit Patel’s about the regulator not having adequate powers to regulate the public sector banks, and currently, their powers were restricted to private sector banks.

The RBI Governor had recently said to the press “There has been a tendency in the pronouncements post revelation of the fraud that RBI’s supervision team should have caught it. While that can always be said ex-post with any fraud, it is simply infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by ‘being there’.”

This brings a new revelation and answers why the public sector banks have been happily accumulating non-performing debts and scams after scams without much guilt. In its 50 page report, the BBB has made recommendations relating to governance, reward and accountability frameworks. It accused the government of curtailing the role assigned to it. ( the BBB was assigned a role in stressed assets which it was never allowed to perform ). If the government has curtained the roles of both the Central Bank and the BBB, it seems no wonder that the public sector banks are in the state they are in. Basically, there is no one to control them and they can run continuously with impunity to waste public money and run amok on their own. The government has proved to be a benevolent owner of public sector banks who not adequately qualified to control their operations.

Under the circumstances, the Government has only itself to blame for the current sorry condition of public sector banks. Rather than making privatization the easy answer to solve the problems of public sector banks, they should give more authority to the Central Bank ( same powers as over private sector banks ) to supervise the working of public sector banks.

After all, banking regulatory powers must be ownership neutral to be effective.

Prabhakar Mundkur has spent 40 years in advertising and worked in India, Africa and Asia. He is currently Chief Mentor with HGS Interactive a part of HGS in the Hinduja Group. He is on the advisory board of Sol 's Arc ( ) an NGO dedicated to special education for intellectually challenged children. He is also a member of Whiteboard ( ) which supports senior management of NGOs in financial management, PR, Communication and HR through pro bono expertise.

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