End the problem of dual control of PSBs: YV Reddy

YV Reddy, former Governor of Reserve Bank of India, on Thursday called for putting an end to the problem of “dual control” of public sector banks.

Reddy was delivering the Anniversary Lecture on ‘Indian Economy: Asking the right questions’ on Bandhan Bank’s third year anniversary celebrations here on Thursday.

‘Dual control’

“The problem of dual control has to end. Public sector banks which are established under statutes of Parliament should be reorganised as entities under Companies Act, duly licensed by the RBI as a bank,” Reddy said. The present RBI Governor Urjit Patel had recently said that the central bank did not have enough powers to regulate public sector banks.

According to Reddy, there are two aspects to the regulation and supervision of the banks—governance and prudential regulation. The governance relates to the fit and proper criteria of the board of directors, the senior management and their role in the functioning of the banks.

The RBI regulates both governance and prudential aspects of private sector banks. In the case of public sector banks, the government exercises all the powers relating to governance, leaving prudential regulation to RBI.

This, Reddy said, was the problem of “dual control” which the Narsimhan Committee had pointed out in the 1990s and also suggested the need to put an end to it. However, the government is “fully responsible” for perpetuating the dual control problem for over 25 years.

Trust damaged

“The strategic view is to have presence of public ownership with a defined purpose to take care of contingencies or activities that cannot be performed by private sector. We should allow both public and private sector banks to exist and compete,” he said.

Reddy also pointed out the need for putting an end to ‘populist negativism’ and highlighted the need for restoring confidence in the banking system. “It is true that there were many questionable decisions taken by some banks in the past. The publicity to misdeeds in the banking industry, especially by large corporations and severe actions initiated by investigative agencies has received applause by the public at large. However, the damage that it is doing to the trust in the system and to the moral of the participants in the system has been totally underestimated,” Reddy said.

Diluting promoter holding

Bandhan Bank, which completed three years of operations, is waiting for RBI directions on the issue of bringing down the promoter holding in the bank.

As per RBI mandate, the bank was required to bring down promoter holding to 40 per cent from the present around 82 per cent within three years of operations, which ended on August 23, 2018.

“We are awaiting for the RBI directions on this (bringing down promoter holding),” CS Ghosh, MD and CEO, Bandhan Bank told newspersons on the sidelines of the third anniversary celebrations here on Thursday.

The bank went for an initial public offering (IPO) in March 2018. As per SEBI guidelines, a company cannot dilute promoter holding within one year of listing, which in Bandhan’s case would be March 2019.

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