Context:

The Supreme Court has ordered the Reserve Bank of India to disclose its annual inspection reports of banks, along with the list of wilful defaulters and information related to them under the Right to Information Act. The Supreme Court has also emphasised that RBI is ‘duty bound under the law’ to disclose information sought under the RTI Act.

Background:

• In 2011 the Central Information Commission said the public has the right to know how banks are functioning since significant amounts of public funds are kept in banks.
• Former CIC Shailesh Gandhi had directed the RBI to disclose the names of banks that had been penalized or served show-cause notices. However, the central bank defended its stance on the grounds of protecting fiduciary and commercial interests.
• In 2015, a petitioner had sought copies of inspection reports of certain commercial banks from April 2011 under the RTI Act.
• THE RBI withheld the information citing ‘economic interest’ and ‘fiduciary relationship’ with banks.
• Ruling on the matter in December 2015, Supreme Court judge M.Y. Eqbal rejected RBI’s defence of “economic interest” and “fiduciary relationship”.
• The court observed that the RBI is a statutory regulatory authority which oversees the functioning of the banks and the information about the banks is with it only by virtue of its nature as a statutory authority.
• The court had held that the RBI is accountable to the general public and cannot withhold information under the defence of “trust” with the financial institutions.
• The banking regulator has repeatedly tried to stonewall multiple requests seeking information ranging from the names of wilful defaulters on bank loans worth hundreds of crores of rupees, to the bank-wise breakup of mark-to-market (MTM) losses and the losses in foreign currency derivatives contract cases.
• The SC has now ruled that the RBI’s Non-Disclosure policy is in violation of its order and has warned RBI that further violations would be viewed seriously.
• The order is a part of long-running attempts to extract financial information in the backdrop of mounting bad debts at banks, with the RBI resisting such attempts and bankers worrying about the potential impact on financial stability.
• Banks’ total non-performing assets amounted to ?11.2 trillion in FY18.
• In November 2018, the CIC served a show-cause notice to then RBI governor Urjit Patel for “dishonouring” a Supreme Court judgement on disclosure of wilful defaulters’ list. The CIC has also asked the Prime Minister’s Office, the finance ministry and the RBI to make public a letter written by former RBI governor Raghuram Rajan on bad loans.

Details:

• RBI is empowered under section 35 of the Banking Regulation Act, 1949 to conduct annual inspection of all commercial banks—public, private and foreign. It conducts an on-site inspection of all banks once a year.
• RBI officials visit the head offices and branches of banks to inspect the books.
• Currently, the annual inspection is based on a Risk-Based Supervision method which focuses on “evaluating both present and future risks, identifying incipient problems and facilitates prompt intervention/early corrective action”.
• It covers financial position, functioning of board and various links of the bank, details of assets and liabilities, treasury management, asset liability management, liquidity operations, para banking activities, etc. Earlier RBI used to follow the CAMELS approach—capital adequacy, asset quality, management, earning, liquidity and system and control.
• The content of the annual inspection report is discussed with the head of the particular bank before finalization. The final report is then shared with the banks to enable them to take corrective steps.
• “Typically bank inspection reports are not made public. The report is a comprehensive assessment of banks as an entity. Various thoughts can be taken out of context and could lead to wrong conclusions. That is a danger,” said R. Gandhi, former RBI deputy governor.
• “Banks hold deposits on demand. This kind of information, if it goes out in the public domain, will have an impact on financial stability. The RBI has been arguing that this is a matter of confidentiality between the central bank and other entities and section 28 of the RBI Act allows them to disclose only confidential rather than individual information,” said a former RBI official.

Conclusion:

At a time when the level of bad loans at commercial banks continues to remain worryingly high, worsening their combined capital to risk-weighted assets ratio (CRAR), it is inexcusable that the RBI continues to keep the largest lenders to banks, the depositors, and the public in the dark on the specific loan accounts that are endangering the banking system’s health and viability.   The central bank’s intransigence and repeated failure to honour the court’s orders ultimately undermines the very rule of law it seeks to enforce as a banking sector regulator empowered by Parliament.