Former Deputy Governor of RBI, R. Gandhi, who headed a committee to review the cooperative banking sector in 2015, says the government and the Reserve Bank of India should initiate governance reforms in cooperative banks as recommended by his committee, such as mandating professionally run board of management in these entities. Excerpts:
RBI often imposes restrictions on cooperative banks, the latest being those on the Punjab and Maharashtra Cooperative Bank. What exactly is the issue with such entities?
There has been always a concern over the cooperative banks’ governing structure.. The board of directors are appointed based on election by the shareholders.
The governance structure in banks or in other financial institutions is that it should be professionally managed.
And the shareholders’ representation should be minimum.
It is the independent directors who are majority.
That is the structure we are unable to bring into the cooperative banks because of the basic nature of the Cooperative Societies Act. Under that, the board of directors is based on election by the shareholders.
How can you bring professionalism to decision-making in cooperative banks?
The RBI had been suggesting, the Malegam Committee suggested earlier, my committee also suggested — since we cannot change the Constitution and even the Cooperative Societies Act derives power from the Constitution — that a board of management in cooperative banks should be delegated powers similar to what commercial banks have given to their boards of directors. This will be the de facto board of directors. That has not been done yet.
How will that help?
What we want is that the board of directors should have independent assessment of the bank’s functioning, supervising monitoring. It should have the moral strength to question the shareholders’ representative.
So that the line management will have the greater confidence to act professionally.
Can RBI alone mandate the changes that have been suggested by various committees?
The government has to play along with the Reserve Bank to insist that these things should be done.
Do you think the cooperative banking sector will face a crisis of confidence due to the PMC Bank issue?
I do not think the cooperative banking system will face any crisis of confidence due to the PMC Bank issue.
PMC has got all the attention because it is Mumbai-based and is reasonably big sized. Otherwise, the RBI periodically has been liquidating cooperative banks or putting them under restriction. At one point, there were 2,900 cooperative banks, at its peak.
Today it is less than 1,500. The number is coming down because the RBI has been slowly eliminating the bad banks.
