July 30, 2012 / 22:26 IST
Saikat Das
moneycontrol.com
Two weeks back, a strong statement by RBI governor D Subbarao on the government's dictatorial style of exercising ownership in state-owned bank triggered mixed reactions among bank bosses. Some were heartened by RBI's support, while others were highly apprehensive of being sandwiched between the regulator and the administrator.
And financial services secretary DK Mittal's "suggestions" last week on how state-owned banks should be doing business has caused a sense of unease among many bank chiefs, and also does not appear to have gone down well with a section of the regulator.
Mittal's "suggestions" (some bankers say instructions) include extending more credit to agriculture and small and medium enterprises, capping bulk deposits, ultra small branches, joint lending platform, uniform dais to bid for IT software, revising interest rates and so on. Senior bankers say there has been over a couple of dozens of such suggestions/directives from the finance ministry over the last year.
Two weeks back, the RBI governor had said there occasionally were concerns over the government exercising its ownership rights not through the established channel which is the board mechanism, but outside of board. "I don't think that it is a good example of good corporate governance," Subbarao had said.
And some feel Mittal's recent comments can widen the rift between the RBI and finance ministry.
"No banker can say those are unhealthy measures for the banking industry," an executive director from a Mumbai-based bank told moneycontrol.com.
"Banks are individually discussing all suggestions at the board's level. Sooner or later, the same set of directive would have come from the RBI itself. But one needs to read between the lines. So who should banks listen to? This is an issue of corporate governance and banks are getting sandwiched between the RBI and the finance ministry," the official said.
And Mittal's free-flowing directives are causing angst within the regulator as well.
"It is a regulator's job to frame policies and it is FinMin's lookout to ensure proper implementation. The repeated directives from the ministry are taking away the independence of banks' individual board. The same can be done through proper channel like board mechanism," said a senior official at the regulator.
Even though some of D K Mittal's proposals augur well for the banking industry, there are some practical bottlenecks to implement it, said a senior banker, who had once served rural branches as a branch manger. For example, there is a particular reason as to why banks may be shying away from agricultural credit. When banks give loans to farmers, there is always a high risk of defaults. In most of the cases, a gram pradhan (village head), who enjoys huge political clout keeps instigating farmers not to repay loans especially when an election is nearing. He gets prior intimation from his political masters about a probable farmer loan waiver. Consequently, farmers continue to default. This also creates room for corruption for a branch manager, who keeps renewing loans so that the original loan does not show up as a bad asset.
Bank chiefs are hoping the regulator and the finance ministry resolve their difference so that they won't be forced to take sides.
"There are some overlapping of areas between the regulator and our major shareholder (government)," said a CMD of a south-based lender.
"Both of them need to sort it out in due course. We wait for an amicable solution that will be of great help for banks' operation," the CMD said.
Periodic cold war between RBI and the department of financial services is nothing new. But it always makes headlines whenever it surfaces.
saikat.das@network18online.com 
