The war of words between the RBI Governor Urjit Patel and the Finance Ministry over the recent bank frauds in the country seems unlikely to die down. After Finance Minister Arun Jaitley, the Chief Economic Advisor Arvind Subramanian is the latest person to jump into the fray.
Subramanian told The Indian Express that independence of a central bank is not only acquired through law but also by actions and good decision-making. The Chief Economic Advisor added that a series of bad decisions can impact the credibility of a central bank.
Subramanian's comments come close on the heels of remarks by the RBI Governor Urjit Patel during his speech at the Gujarat National Law University where he pointed out that the RBI's power over PSBs was weaker than that over the private sector banks.
The RBI Governor had said that RBI's legal powers to supervise and regulate PSBs are constrained. "It cannot remove PSB directors or management, who are appointed by the government of India, nor can it force a merger or trigger the liquidation of a PSB. It has also limited legal authority to hold PSB Boards accountable regarding strategic direction, risk profiles, assessment of management, and compensation," Patel had said.
The government, which owns well over 51 per cent in most public sector banks, has the power to appoint nominees on PSB boards. Chief Economic Advisor Arvind Subramanian had earlier flagged the problem of PSB nominees skipping meetings.
Last month, Finance Minister Arun Jaitley indirectly blamed the RBI for belatedly waking up to the fraud. "We must always remember that regulators have a very important function. They ultimately decide the rules of the game and they have to have a third eye kept perpetually open and turned towards the sector. But unfortunately, in (the) Indian system, we politicians are accountable, the regulators are not," he was quoted as saying.
While the questions on how India's biggest banking fraud was allowed to play out for so long and with whom did the buck stop are yet to be fully addressed, both the regulator and the government seem to be shirking their responsibility.
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