Says it’s time to discard discretionary policies and bring in rule-based governance

Indian banking system needs a clean up of governance especially at the bank board level, Reserve Bank of India Deputy Governor, K.C. Chakrabarty has said.

Highlighting various ills of Indian banking, Chakrabarty has called for adoption of rule-based regulations as against the largely discretionary policies being followed now.

“You need to take a call whether our system should be rule-based or principle based. But don’t keep it discretion based as is the case now. I have worked for 30 years in banking industry. In our country everything is discretion based”, Chakrabarty said at the 35{+t}{+h} Skoch Summit in the capital on Friday.

These remarks are significant as it came a day after news broke out that Chakrabarty had sought early retirement and was looking to demit office two months in advance to the earlier indicated end June date.

Financial inclusion

Chakrabarty slammed bank boards for the “big governance deficit”, highlighting that they have still not bought into the idea of financial inclusion as a business proposition.

Time has come for fixing accountability (in a transparent manner) to banks’ senior management and board so as to ensure adoption of financial inclusion.

“Bank boards do not consider financial inclusion as a viable business proposition. They don’t apply their mind how to make it viable. They also don’t agree that it (financial inclusion) has to be done in interest of society”.

Making bank board accept financial inclusion as a viable business proposition is the need of the hour, he said adding that “Otherwise our society will not survive”.

Weak governance

Chakrabarty said there was need to strengthen governance at the Bank Board level and pointed out that it was easy to accomplish in a democracy.

Also, there has to be transparent norms on how does one select a Bank Board, RBI Deputy Governor, what tenure should such a person get and what will be his responsibilities etc

Clean up needed

Bank boards are not always competent and they have not always understood the business they are in, pointed out Meghnad Desai, Professor Emeritus, London School of Economics.

A lot of bank failures happened with boards which thought they were good boards. “There is a need to clean up bank governance much more across the board and across the world than we do”, he added.

(This article was published on March 21, 2014)
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