RBI favours splitting chairman, MD posts in PSU banks

Reserve Bank Governor D Subbarao today favoured bifurcation of the posts of chairman and managing director in state-run banks, saying the experience of such a split in the private sector has been satisfactory.

Stating that the central bank is in discussions with the government to split the posts of the chairmen and managing directors of state-run banks, the governor said, "Given our own positive experience, as well as the global endorsement for this position [of separation of these posts]... We will discuss this issue with the government."

"This experience proves to be positive in the private sector banks [in our country], which has also been proved to be value-adding in international banks. Not giving too much power to one person is good," he told reporters on the sidelines of a Ficci-IBA summit here this morning.

Addressing the banking summit, Subbarao, however, warned that an important criterion for deciding on splitting the post of chairmen and managing director in PSU banks "will be to what extent we will be able to lay down and enforce strict eligibility criteria for the position of the chairman of the board of a public sector bank."

The RBI had set up a committee under the chairmanship of AS Ganguly in FY05 to study the issue of bifurcation of the posts of chairman and managing director of banks, which had recommended such a bifurcation.

Following this, such a bifurcation was implemented in private sector banks in 2007. "The Reserve Bank implemented the Ganguly group recommendations in all the private sector banks in 2007. Experience shows that this arrangement has worked well," Subbarao said.

It can be noted that in the public sector banks, the top executive is designated as chairman and managing director, with the exception of the largest lender State Bank, where the top honcho is the chairman and there are four managing directors with clearly defined executive roles under him.

Explaining the logic behind such a separation, Subbarao said that bifurcation of leadership of the board from the day-to-day running of the business will bring about more focus and vision, as well as give the necessary thrust to the functioning of the top management of the bank.

It will also provide effective checks and balances.

When asked whether the RBI will allow corporates to enter the banking space, he said, "We have sent in a draft amendment to the Banking Regulation Act to the government and the government is working on it. So amendments to the Banking Regulation Act are necessary before we contemplate corporates coming into the banking system."

"While the guidelines for the new bank licences will be issued shortly, the amendment to the Act is uncertain," the governor told reporters on the sidelines of the banking meet.

On whether the regulator is worried about whether other banks will follow ICICI Bank in offering dual rate home loans, Subbarao tersely said, "If that is a concern, we will respond to that. I cannot answer it now."

Last week, the country's largest private lender ICICI Bank introduced two home loan products similar in some respect to teaser home loan schemes.

It gives borrowers the option of having a fixed interest rate for up to the first two years of a loan to shield customers from frequent changes in home loan interest rates and protect them from any rise in interest rates over the next one or two years.

The Reserve Bank has raised key short-term interest rates 11 times since March, 2010, in order to tame inflation. Headline inflation stood at 9.22% in July, 2011, much above the RBI's comfort zone.

Under the new schemes, a borrower will pay interest of 10.50% on a home loan under Rs 25 lakh in the case of a one-year fixed interest rate and 10.75% per annum for the two-year fixed product.

On completion of the fixed interest rate period, the loans will turn floating in nature and will be linked to the bank's base rate.

Source: Business Standard