Opinion | Tough love is welcome, RBI; but tell us why

So, what has changed in this three weeks? What did the RBI discover that it has given notice to Kapoor to vacate his post in another four months? These questions may send conflicting signals to shareholders.

In the absence of any communication from the regulator to the public, all one can do is hazard a guess as to why Kapoor was ejected. The consensus is that RBI was unhappy about the large under-reporting of loans by Yes Bank. A central bank audit found bad loans at Yes Bank were four times the reported number for the financial year 2017.

It is nobody’s case that bank CEOs ought not to be asked to go if they are misreporting financial statements. Ideally, the board of the lender should have stepped in and asked the CEO and other personnel responsible for under-reporting numbers to go. That did not happen, prompting the regulator to step in. Why it has not taken any action against the board is another question that’s left hanging.

Even in Shikha Sharma’s case, the wide difference in RBI’s assessment of bad loans with the reported numbers is presumably the reason why the central bank cut short her re-appointment. Another possible reason could be the allegations of money laundering in some of Axis Bank’s branches during demonetisation.

If bad loan under-reporting is the reason, it should be stated so. After all, Axis and Yes Bank are not the only ones to show lower bad loans.

The central bank’s message is clear --  it will not hesitate to pull up banks and their powerful chiefs – but the communication could be more direct. Other regulators, like say, the Securities and Exchange Board of India (SEBI) pass speaking orders - an order that speaks for itself – when they declare a person or entity not ‘fit and proper.’

What are the counter arguments for RBI’s lack of disclosure?

One, there seems to be a thinking within the central bank that too much disclosure could harm the public interest, and even spark a contagion. A bank, irrespective of its ownership, is an institution of trust and holds public money. RBI preferably wants to do things quietly and resolve problems even if it causes uncertainty for shareholders. But this argument cuts both ways. If depositors and shareholders are left guessing what’s wrong with a bank, it could have disastrous consequences.

Second, RBI probably does not want to upbraid private bank CEOs when it can’t do the same to public bank chiefs. The regulator has been unhappy over the lack of powers over state-owned banks. Governor Urjit Patel said as much when responding to criticism over the $2 billion fraud at Punjab National Bank. RBI has no say over the appointment or dismissal of PSU bank chairmen, managing directors and the boards. It also wants to remove the central bank nominee from the board of such banks to prevent conflict of interest situations.

There is a message in this for the government: Allow the central bank enough independence and authority to achieve its objective and take RBI to task if it fails. The flexible inflation targeting framework is a good example that can be followed in banking regulation as well.

There is a message for RBI too: it should communicate more clearly in the interests of fairness and transparency.