Opinion Why bank on EC

Since banking is an activity that requires high levels of faith in the owner, the regulator must protect customers by choosing well. Following this, it should carry out high quality microprudential regulation of the bank. In case the bank is about to fail, the regulatory system should have a resolution corporation that sells off the sinking bank, before it fails, to another buyer, with minimum recourse to the tax payer.

The RBI has, however, failed to perform the above functions. For 10 years, it has not given out bank licences. It has no system in place, no on-tap licence mechanism that would have prevented the issuing of bank licences from becoming a big event.

Today, thanks to this failure, the giving out of bank licences has become a possible instrument for political favouritism. And thus, in the run-up to a Lok Sabha election, it was referred to the Election Commission. This should not have been the case. Bank licences should not have been scarce and they should not command scarcity value.

Today, regardless of who gets it, the rare licence will be able to draw in high profits. For this reason, bank licences are seen as something the regulator is handing out to a few and it could invite charges of favouritism or bribery in the process. To avoid being perceived as corrupt or favouring friends, RBI Governor Raghuram Rajan set up a committee that included individuals like former RBI governor Bimal Jalan and former Sebi chief C.B. Bhave to screen the applications.

The committee would not have been necessary if the RBI had been doing its job on a regular basis and was a well-functioning institution whose board made the decisions to give licences. Rajan would also not have had to protect his decisions from being questioned by referring the matter to the EC. If the independence of the banking regulator had been completely unquestioned, the EC would have no say in the matter