Subbarao asks govt to show ‘exemplary corporate governance’ in banks

In 21 banks,including SBI,the government owns majority stake

Written by ENS Economic Bureau | Mumbai | Published: July 13, 2012 12:56 am

The Reserve Bank of India has expressed concern over the government “occasionally exercising” its ownership rights in banks and financial institutions (FIs) through channels outside of their boards,and asked it to show “exemplary behaviour of corporate governance and exercise the ownership rights through the board”.

“There are questions about how the government will play out its ownership role. This is not restricted to Nabard,it is something which is being played out in a number of institutions including the commercial banks,” RBI Governor D Subbarao said at the 30th foundation day function of Nabard here. In 21 banks,including SBI,the government owns majority stake. Besides,it has majority ownership in many FIs including four general insurance firms and one life insurer,LIC.

“Occasionally there are concerns over the government exercising its ownership rights not through the established channel which is the board mechanism,but outside of the board,” he said.

“I don’t think that it is a good example of good corporate governance. One thing for the government could be to show exemplary behaviour of corporate governance and exercise their ownership rights through the board. I think that would be good for all financial institutions,including Nabard.”

The RBI also says that agricultural loans that carry lower rate of interest are being diverted for non-agricultural purposes.

“Anecdotal evidence suggests that some agricultural loans,contracted at a sub-market rate of interest because of the subvention,are being diverted for non-agricultural purposes,” Subbarao said.

“This evidently defeats the objective of the subvention scheme and needs to be corrected either by remodelling the subvention scheme or through tighter monitoring of the end use of agricultural loans,” he added.

“We need further studies to understand whether the interest subvention scheme is distorting the flow of agricultural credit,” Subbarao said. He said the regional distribution of agricultural credit by commercial banks,both in terms of quantum of credit and the number of accounts,has been skewed.

There is a significant concentration in the southern states,followed by the northern and western states. In contrast,the share of the eastern (Bihar,Jharkhand,Orissa and West Bengal) and the north-eastern states has been low.

(With Agencies)

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* RBI has expressed concern over the government exercising ownership rights in banks and financial institutions through channels outside their boards,and has asked it to set an example of exemplary corporate governance by not doing so

* RBI also says that agricultural loans carrying lower interest is being diverted for non-farm purposes

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