Does RBI need a commercial banker as deputy governor?

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The Reserve Bank of India (RBI) deputy governor Anand Sinha retired last week. So, the Indian central bank had to distribute Sinha’s portfolio among three other deputy governors—K.C. Chakrabarty, H.R. Khan and Urjit R. Patel—till his successor is appointed.

The critical department of banking operations and development as well as inspection will now be looked after by Khan, who will also oversee the department of information technology. Chakrabarty, the most senior among deputy governors, will supervise urban banks and the legal portfolio, while Patel will supervise expenditure and budgetary control.

Traditionally, RBI has four deputy governors—two insiders, one an economist and the other a commercial banker. In the current lot, Chakrabarty is a commercial banker and Khan an insider.

Banking operations and supervision and inspection are critical divisions within RBI, particularly when India’s banks are piling up bad assets and aggressively restructuring loans. Ideally, these divisions should be supervised by a commercial banker with vast experience in running banks. Since they have not been given to Chakrabarty, it is pretty evident that RBI does not necessarily need a commercial banker as one of its deputy governors.

Chakrabarty’s predecessor, V. Leeladhar, former chairman and managing director of Union Bank of India, was in charge of banking operations and supervision. However, this has not always been the case. Before Leeladhar, the banking operation department was handled by K.J. Udeshi, an RBI insider, like her predecessor G.P. Muniappan.

Vepa Kamesam, former managing director of the State Bank of India, was another commercial banker who donned the mantle of deputy governor before Leeladhar, but he too was not given the banking operations department; Kamesam oversaw internal administration, exchange control and currency management.

So, it’s not essential that RBI has a hands-on commercial banker as deputy governor in charge of banking supervision. Going by the law that governs the central bank, RBI cannot have more than four deputy governors, but the law does not stipulate their profiles—how many of them should be insiders and how many outsiders and their fields of operation. By convention, economists, bureaucrats and commercial bankers are chosen for the posts apart from internal candidates.

A bank chairman normally wants to become deputy governor as after running a bank (or many banks), the aspiration is to form policy for the industry. Besides, once a bank chairman becomes a deputy governor, he also gets a longer career: the retirement age of a bank chairman is 60 years but a deputy governor can continue till 62 and even beyond.

Amitav Ghosh, who held the post of RBI governor for a brief period of three weeks in 1985, was the first commercial banker to move to the central bank as a deputy governor in 1982. Ghosh looked after banking operations and development. His successor S.P. Talwar (from Bank of Baroda) too handled the same responsibility.

Appointing a commercial banker as a deputy governor and asking him to look after human resources (HR) or information technology (IT) or administration does not make sense as this is not the best way of using their expertise. Once Chakrabarty retires in June, RBI can stop appointing a commercial banker unless it decides to ask his successor to handle the department of banking operations and development.

RBI can also look at other finance professionals, such as a fund manager or an investment banker or even a consumer goods expert to fill the post of deputy governor. And the selection process should be transparent. Many central banks of developed markets advertise the deputy governor’s job—a process worth emulating.

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