RBI seeks power to supercede banks' board

As early as in 2004, the RBI had requested the government to give it powers to supercede the board of a bank for conduct that may endanger depositors' money. However, the government has yet to act on this request. In the light of the Bank of Rajasthan case, CNBC-TV18's Latha Venkatesh checks out if it is time the government acceded to this request.

The RBI has vast powers to correct an erring bank. It can nominate directors on the board or it can change the CEO or it can order special audits, penalise banks for specific violations like flouting KYC (Know Your Customer) norms or for not following anti-money laundering rules.

In the specific case of Bank of Rajasthan, the rule that promoters should not increase their stake appears to have been violated. Under RBI rules when a licence is given to a private bank, initially the promoters have to stay locked-in till the bank stabilises. Thereafter the RBI insists that the shareholding of the promoter comes down to 10% or below.

SEBI and RBI's investigation alleges that in Bank of Rajasthan's case, this rule has been violated and hence a special power to supercede the board could be needed.

HP Ranina, Supreme Court Advocate and Board Member, RBI said, "There is section 45 5(c) of the Banking Regulation Act which gives the RBI the power to recommend to the central government and the central government will then frame  a scheme of amalgamation of reorganisation. Under 45 5(c) the scheme can say that the entire board can be removed or new directors can be inducted so they have very wide powers. But that can be done only in an extreme case where there is default or where there is substantial violation of RBI norms."

He added, "Central government could accede to the request of the RBI and put some conditions like first take our approval or whatever as in the case of section 45.  If RBI has made such a request they would have compelling reasons to make such a request."