Seven reasons why supervision of public sector banks is impossible

Seven reasons why supervision of public sector banks is impossible
For years, Public Sector Banks (PSB) have played that friendly neighbourhood bank role. People have trusted banks like Punjab National Bank, State Bank of India, Bank of Baroda with their life savings. A lot of ordinary people continue to keep their savings in fixed deposits and avail of low-cost services offered by them. This is despite an era of mobile, efficient banking offered by private sector banks like HDFC Bank and others.

However, it is not merely the customer service that makes the bank an efficient one. It is also how banks utilize the depositors’ money that matters.

The `13,800 crore scam unearthed at PNB has opened up a lot of issues for debate. It has brought to light their inadequate supervision of employees using fraudulent means to misuse depositor money. In comparison to private sector banks, PSU banks have a higher level of non-performing loans. However, the real problem lies somewhere else.

The government has turned the heat on the Reserve Bank of India for poor supervision as public sector banks like Punjab National Bank continue to reveal further complications in the Nirav Modi issue.
The government has put the blame on the RBI for inadequate supervision. Being the central bank, it is RBI’s role to supervise all commercial banks. While RBI has absolute authority over the supervision of private sector banks, it does not have the same power over PSBs like PNB.

RBI governor Urijit Patel has used tough words to let the government know that RBI’s powers to regulate public sector banks like State Bank of India, the biggest lender and Punjab National Bank are limited.

In a speech last week in Gandhinagar, he highlighted seven key points that make governing public sector banks difficult.

Cannot remove directors and management

All commercial banks are regulated by the RBI under the Banking Regulation (BR) Act of 1949. However, the section of this act which vests the power to remove directors and management does not apply to public sector banks. This means the management of public sector banks pays heed to instructions from the government than from the RBI.

Supersession of a bank board

RBI has authority to supersede the board of a bank if it finds any misconduct. However, another section in the BR Act says that this does not apply to PSBs.

Cannot remove chairman or MD

RBI has no authority to remove the chairman and managing director of a bank, unlike a private sector bank.

Cannot force merger

In an event of a financial crisis like the one witnessed in the US in 2008, RBI cannot force a merger in case of PSBs to save the financial system. While it can do that for private sector banks, any such action has to be initiated by the government.

No licence needed for banking activity

PSBs do not need a licence from RBI under Section 21 of the BR Act. So RBI cannot revoke such a licence and maintain order in the financial system. The section applies to private sector banks. RBI can take appropriate action against private banks if investigations reveal any violations but cannot do anything in case of PSBs.


RBI also does not have the power to trigger a liquidation of PSBs under the BR Act.
This action is taken when banks go bankrupt or collapse. In case of private sector banks, RBI can initiate it but has no authority to do so for PSBs.

No authority to separate powers

While RBI insists that all banks should have two people for posts of chairman and MD, it cannot enforce this rule for PSBs. The RBI governor said that duality implies that the MD is primarily answerable only to himself or herself.

The speech by the RBI governor clearly suggests that the government’s ownership of PSBs is creating difficulties for enforcing corporate governance in public sector banks. This is an important red flag raised. For an effective supervision of the entire banking sector and further avoid scams, PSBs have to be brought under a full regulatory purview of the RBI.

The government owns a majority stake in most of the PSBs. It is like the government is a player and an umpire at the same time. It owns the RBI as well as a majority stake in PSBs. This cannot be fair to other banks. One way to tackle this situation is to consolidate some banks and privatise some public sector banks. However, politicians loathe such an action.

In a recent India economic update, the World Bank has stopped short of suggesting privatisation. It has suggested revising incentive structure of PSBs to align more closely with their commercial performance.

The World Bank has also called for a level playing field and opening up of the sector for greater competition.

We have to wait for a major collapse to happen or hope that politicians agree sooner than later to resolve the conflict of interest created by the government ownership of the
umpire as well as some of the players.


Source by:-newindianexpress