The Reserve Bank of India (RBI) building stands in Kolkata (Photographer: Brent Lewin/Bloomberg)

Supreme Court Asks RBI To Make Critical Bank Inspection Reports Public

The Supreme Court asked the Reserve Bank of India to comply with its 2015 judgment to make its annual inspection reports of banks public—information that banking experts said can be damaging if used out of context.

A bench of Justice L Nageswara Rao and Justice MR Shah rejected the argument of the central bank that it has a fiduciary relationship with the lenders—in this case ICICI Bank Ltd., HDFC Bank Ltd., and State Bank of India—and therefore the information sought was exempted under the Right to Information Act. The RBI said that the disclosure will adversely affect the banks’ competitive position but the court rejected the argument.

“It is unfortunate because nowhere in the world have I heard of any regulator having to make their inspection reports public,” R Gandhi, former deputy governor at the RBI, told BloombergQuint. “This is a comprehensive and holistic report on the banks’ performance and when it is made public people can take it out of context, which could lead to an unnecessary loss of confidence in banks.”

The top court’s verdict came while hearing a contempt plea against the RBI for not providing the inspection reports as well as other information sought by petitioners. This includes information on audits and surveys the regulator conducts on various aspects from financials, IT systems, cybersecurity to credit policies and governance at banks.

The top court said it could have found the RBI to be guilty of contempt but gave it one last opportunity to withdraw the disclosure policy as well as provide all information relating to inspection reports except that is exempted on grounds of “having a bearing on the security of the state”. “The respondents are duty-bound to furnish all information relating to inspection reports and other material apart from the material that was exempted in para 77 of the judgment. Any further violation shall be viewed seriously by this court,” the court said.

Gandhi said in an inspection report the regulator analyses millions of transactions and maybe some won’t conform to regulations, and people can draw different meanings which may not be correct. But given that this is a Supreme Court ruling, he said, the RBI will have to follow it.

The top court order came along with its direction to disclose the names of wilful defaulters. Gandhi said the RBI has been maintaining list of wilful defaulters since late 1990s. “The wilful defaulter list is not in dispute at all, the problem is asking for a list of any and all defaulters.”

The former head of a large bank told BloombergQuint that standards that the regulator sets for inspections are very high and not practical in the real world. If a bank has 100 million accounts and the KYC in 0.2 percent is not complete, the RBI says the KYC process is very poor, the person said on the condition of anonymity. But in the real world, the banker said, 99.8 percent is a great ratio to maintain on something like KYC.

And the RBI may point out risks in a corporate account but banks can always go back and clarify that those risks have been mitigated, the banker said. That’s why releasing inspection reports at the RBI level could lead to a lot of misinformation in the public domain, impacting the borrower and the bank since this information is very price sensitive.

According to a former executive director at a public sector bank, it depends on how this sensitive information is used. Releasing the reports will bring more transparency to banks and their managements will be forced to act on any issues that the regulators find, he said. But the information, according to him, can be misused and can be damaging to a bank.

Also read: India's Central Bank Ordered to Disclose Critical Reports