Relevance : GS Paper III
Why has this issue been Raised?
The Supreme Court has told the RBI that it is duty bound to disclose the list of defaulters and also make public its annual inspection reports of banks and financial institutions.
Why RBI Resisted Disclosure?
- For long, the RBI has resisted disclosure of defaulters on the ground that it would violate banking secrecy laws.
- It justified holding back information and inspection reports of its supervisory teams on individual banks on fears of a weakening of trust among depositors and the impact on the financial markets and stocks of listed banks.
Justification of RBI’s Stand
- There is some truth to RBI’s argument in a country with low levels of financial literacy.
- In the past, the country’s finance minister and the RBI were forced to publicly assure depositors and investors of a private bank that their money was safe after a run on the bank, fuelled by rumours.
- Similarly, realising the potential damage which could arise because of the interpretation of a provision in the Financial Resolution and Deposit Insurance Bill on protection of deposits, the government had to step in last year to assuage concerns.
Way Forward
- One approach could be to provide the disclosure information after the RBI and the bank or an institution and its board have achieved closure and taken action based on regulatory findings, to limit any damage.
- This disclosure could be done preferably to Parliament, which could help strengthen prudential supervision.
Conclusion
It is with good reason that after the 2008 financial crisis, governments worldwide are focussed on financial stability. Any hasty step which endangers that mandate may prove costly.
