Pedestrians walk past the International Monetary Fund (IMF) building in Washington, D.C., U.S. (Photographer: Mannie Garcia/Bloomberg News)

RBI Must Have Full Supervisory Powers Over Public-Sector Banks: IMF

The International Monetary Fund suggested that the Reserve Bank of India should be given full supervisory powers over public-sector banks, reviving the debate started by RBI Governor Urjit Patel about the dual regulation of lenders.

The international trade and finance organisation recommended that the central bank’s legal independence must also be clarified, according to the IMF India Staff Report.

Patel had in March highlighted the dual regulation of public-sector lenders—by the central bank and the government—stressing that it created “deep fissures in the landscape of banking regulatory terrain”. That came amid criticism that the RBI failed to detect the Rs 14,000-crore fraud at a branch of Punjab National Bank involving allegedly fraudulent guarantees obtained by firms related to jewellers Nirav Modi and Mehul Choksi.

The IMF report, prepared after discussions with officials from the RBI and the Ministry of Finance, suggested improved governance and financial operations at state-owned banks to ensure that such frauds aren’t repeated.

The government should also pursue more far-reaching governance reforms, the IMF said. These, according to the report, include removing the RBI representatives from banks’ boards and defining better the terms of reference for members, including the Ministry of Finance nominee, to strengthen the quality and independence of the boards.

It also called for a strategic plan for consolidation, divestment and privatisation of public-sector banks. The report suggested higher participation of the private sector in banking.

The recent successful IPO (initial public offering) of a private bank that had started out as a microfinance institution, the vibrancy of India’s non-bank financial corporations, and the rapidly-developing fin-tech space illustrate the viability of market-based solutions to India’s access-to-finance and financial-inclusion challenges
IMF India Staff Report, 2018

Other Recommendations

  • On the RBI’s Feb. 12 circular for stricter framework for debt restructuring, the IMF said the norms should be made more flexible.
  • There’s a need for better vigilance over private sector banks and non-banking finance companies, which have shown strong growth in credit to households, to make sure that these institutions uphold underwriting standards.
  • The government should also continue to gradually reduce the statutory liquidity ratio to help deepen markets and encourage lending.
  • The RBI should also re-examine priority sector lending targets, which apply equally to private banks. These targets, according to IMF, distort resource allocation, result in contingent and actual fiscal liabilities that have repeatedly been associated with public sector banks, and lead to financial repression.

Also read: India's Economy Is Elephant That's Starting to Run, IMF Says