The Reserve Bank of India is exploring the option of not appointing its serving officers on the boards of government-owned banks and financial institutions.
According to central bank sources, this is being done for two reasons: to avoid conflict of interest and bring in transparency in the functioning of the banking regulator. There is a third reason, too.
There is thinking on Mint Road that if a bank is involved in any wrong doing, all board members should equally be held responsible. Such a scenario can be embarrassing for the central bank if it has its own official on the board.
All government-owned banks, including the State Bank of India and the Punjab National Bank, and financial institutions such as the National Bank for Agricultural and the Rural Development (Nabard) and the National Housing Bank have RBI-nominated independent directors.
For large institutions such as the SBI and Nabard, deputy governors are appointed on the board as RBI representatives. For other banks, chief general managers are appointed.
Sources say the RBI is of the view while it will not appoint any of its serving officers on the boards of government-owned institutions, it may recommend retired officers or other professionals. The RBI usually does not send its representatives to the boards of private sector banks but can appoint observers if the need arises.
The latest RBI move has been triggered by the issue of under-provisioning by the SBI. The matter came to light only when the bank announced its quarterly earnings in April.
The SBI, which deferred its provisioning requirement for pensions, had requested the regulator to allow provisioning to be made from capital reserves, which is not considered a prudent practice. While the RBI entertained the SBI's request as the provisioning burden was huge, at Rs 8,000 crore, it asked smaller banks to take a one-time hit.
RBI sources say public sector bank chairmen and managing directors also insist that the RBI have a representative on their boards, mainly to counter the pressure from government nominees.
