Incremental reform of banking law in India

A banking sector regulator must be non-partisan and separate from government. However, the banking sector in India comprises banks of many kinds: private banks, public sector banks, cooperative banks, and regional rural banks. The laws that govern the sector have evolved to grant special powers over some categories of banks to the Union government, thereby, diluting or sometimes even nullifying the power of the Indian banking regulator, the Reserve Bank of India (RBI), over these banks. In most cases, the power of the RBI has been diluted or nullified in respect of public sector banks and the State Bank of India. This is not desirable from the perspective of ownership neutral regulation and creates an unfair playing field for banks in the sector. It also raises serious conflict of interest concerns, where the government is both a borrower and regulator, can influence the functioning of some banks. This article examines the legal provisions that undermine the regulatory powers of the RBI including on shareholding, appointment of directors, winding up and making schemes. It argues for an ownership-neutral regulatory framework emphasising the need for greater autonomy for the RBI, and the creation of of a clear separation between the governments borrowing and regulatory role. The aim is to chart the pathway towards a more robust regulation of the banking sector in India.