RBI not having power to regulate PSBs

This has made things lopsided when it comes to governance of Indian banks. The RBI can issue guidelines to private banks or foreign banks, but not to the PSBs. This anomalous duality may be under review with a course correction on the anvil. In March 2018 a throwback to this anomaly was when former RBI Governor Urjit Patel gave a speech entitled 'Banking Regulatory Powers Should Be Ownership Neutral' in a speech threw into relief that even though the RBI is the banking regulator, the powers to regulate PSBs are held by the government.

The Banking Companies Acquisition and Transfer of Undertakings Act, 1970, the Bank Nationalisation Act, 1980 and the State Bank of India Act of 1955 are the regulations that the government of India regulates on PSBs.

Patel stated that Section 51 of the Banking Regulation Act 1949 distinctly states that the RBI does not have powers on critical aspects of governance in the PSBs.

The RBI cannot remove chaipersons, managing directors and directors of a PSB, the central bank can't force a merger or liquidation in the case of PSBs, the PSBs do not have a licence from the top bank, nor can it revoke their licence. Action is being contemplated to correct this aspect of regulation and governance.

In July 2018, the government informed the parliament in a conflicting statement that RBI has wide-ranging powers to regulate and supervise PSU banks, including dismissing banks boards and management.

In response to a question in the Rajya Sabha, the Centre stated that RBI powers are broad-ranging and comprehensive to deal with various situations that may arise in banks, including RBI has powers to inspect the bank and its book of accounts, has a nominee member on the board of state-owned banks and is part of a committee that approves large loans.

RBI can appoint additional directors on the banks' boards. RBI has a repository for all large credit exposures and a central fraud registry where banks report all frauds above 1 lakh. It has powers under the foreign exchange management act. Despite a flourishing private sector banking space, the bulk of banking assets in India are under the Department of Financial Services aegis.

Many bank scams have been unaddressed over the years, which has led experts to question duality of control.