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Thursday, July 12, 2012

RBI Governor Restricts Babus In Ministry of Finance


RBI asks ministry not to micromanage banks
Governor Duvvuri Subbarao says government must exercise ownership only through board for corporate governance
BS Reporters / Mumbai/ New Delhi Jul 13, 2012, 00:34 IST
http://www.business-standard.com/india/news/rbi-asks-ministry-not-to-micromanage-banks/480279/ 

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.



Do not micromanage PSU banks, former RBI chief YV Reddy tells government


MUMBAI: YV Reddy, the former central bank chief, has called upon the government not to attempt to micromanage public sector banks and let the regulator retain a firm hand on the tiller.

Reddy, whose conservative policies are widely regarded as having insulated India's financial system from the global economic meltdown of 2008, appeared to endorse the views of his successor Duvvuri Subbarao, who last week said the finance ministry should demonstrate exemplary corporate governance by exercising its ownership rights through bank boards.

Subbarao's remarks appeared to have been prompted by frequent letters from department of financial services secretary DK Mittal, issuing detailed directions to state-owned banks on operational matters such as capping bulk deposits at 10% of total deposits.

"The regulator has to regulate. The majority owner, in terms of corporate governance, cannot dictate operationally," Reddy said in an interview to ET on Monday, adding that detailed instructions to banks were contrary to the spirit of reforms.

Reddy, 70, was RBI governor from September 2003 to September 2008.

Reddy Disagrees with Rangarajan

Reddy also disagreed with one of his predecessors, C Rangarajan, who now heads the PMEAC, on the preconditions for issuing new bank licences. In an interview published in this paper on July 9, Rangarajan had expressed himself in favour of more banks being licensed without waiting for a change in laws giving greater powers to RBI.

But Reddy asserted that Indian business houses, the likely recipient of banking licences, were involved in a wide range of activities and RBI needed more powers to regulate them.

"You already have Indian corporates in the mutual fund industry; they have got interconnected insurance companies, they have interconnected NBFCs and then if you add banks, then it is going to be extremely difficult for a regulator. The whole conglomerate structure, it is not only going to be a financial conglomerate, but an industrial-cum-financial-cumbanking conglomerate, which may become too big to regulate," he said.

"The number of banks is fairly large. Therefore, there is no compulsion to issue licences ahead of regulatory reforms in India," he added. On the subject of micromanagement of state-owned banks, Reddy said a distinction had to be made between regulatory excesses and inappropriate interference by the state.

"In case of regulatory excesses, you can say whether the regulator can prescribe a fee for the bank or it can cut a fee. Since banks are licensed by the regulator and it has a responsibility (but) you can say that such a thing is not right. But it is not an interference.

Government, which is a majority owner, giving direction on operations routinely and not as an exception — an operation which is strictly within the conflict of the board — is inappropriate governance, inconsistent (with) reform and not even protecting the right of minority shareholders," he said.

The lesson to be drawn from the current debate between the ministry of finance and the RBI is that all actions and policy measures should be consistent with reforms, said Reddy.

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