From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : NPA Crisis
The contentious issue of whether banks should disclose inspection reports by the Reserve Bank of India (RBI) is back in the news once again after a division bench of the Supreme Court referred writ petitions filed by banks to another bench for reconsideration.
What is RBI’s inspection on banks?
- The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect and supervise commercial banks.
- These powers are exercised through on-site inspection and off-site surveillance.
- RBI carries out dedicated and integrated supervision overall of credit institutions, i.e., banks, development financial institutions, and non-banking financial companies.
- The Board for Financial Supervision (BFS) carries out this function.
- Banks currently disclose the list of wilful defaulters and names of defaulters against whom they have filed suits for loan recovery.
Note: CAMELS is an international rating system used by regulatory banking authorities to rate financial institutions, according to the six factors represented by its acronym. The CAMELS acronym stands for “Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity.”
Why in news now?
- In 2015, the Supreme Court had come down on the RBI for trying to keep the inspection reports and defaulters list confidential.
- This was aimed for the public disclosure of such reports of the RBI, much against the wishes of the banking sector.
- The SC had said the RBI has no legal duty to maximize the benefit of any public sector or private sector bank, and thus there is no relationship of ‘trust’ between them.
- It added that the RBI was duty-bound to uphold the public interest by revealing these details under RTI.
What is the issue?
- The RBI was allowed to make such reports public following the Supreme Court order.
- The SC had wanted full disclosure of the inspection report.
- However, the court agreed that only some portions on bad loans and borrowers would be made public.
- Banks have been refusing to disclose inspection reports and defaulters’ lists.
Issues with report publication
- Bank defamation: As banks are involved in dealing in money, they fear any adverse remarks — especially from the regulator RBI — will affect their performance and keep customers away.
- Trust of the account holder: Banks are driven by the “trust and faith” of their clients that should not be made public.
- The invalidity of RTI: On the other hand, private banks insisted that the RTI Act does not apply to private banks.
- Right to Privacy: Banks also argued that privacy is a fundamental right, and therefore should not be violated by making clients’ information public.
Why are banks against disclosing inspection reports?
- Many feel that the RBI’s inspection reports on various banks, with details on alleged malpractices and mismanagement, can open up a can of worms.
- As these reports have details about how the banks were manipulated by rogue borrowers and officials, banks want to keep them under wraps.
- Obviously, banks don’t want inspection reports and defaulters’ lists to be made public as it affects their image.
- Customers may also keep out of banks with poor track records.
Try this PYQ now:
Q.In the context of the Indian economy non-financial debt includes which of the following?
- Housing loans owed by households
- Amounts outstanding on credit cards
- Treasury bills
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3
Post your answers here (You need to sign-in for that).