Evolution of RBI’s Board (1935 onwards)

Despite one wanting to withdraw from Currency Withdrawal exercise, it continues to ask questions and remains exciting.

The role of RBI Board in the exercise which was a mystery in the early part of the debate (not for the readers of this blog ) has become a major issue now. There are comments on both side of the debate. Some suggest the role of RBI Board shows how RBI has lost its autonomy and others who suggest this is not the case. Then there were concerns raised about FSLRC’s suggestion on reducing the RBI Board strength which has not been commented by anybody.

As there is so much chaos, it is best to get back to genesis. How did RBI Board evolve?

RBI’s first volume of history has given a good account of this issue. Interestingly, this constitution of Board of RBI was one of the central points of discussion just like we do for MPC today. The British government and Indian elite both fought battles to ensure that maximum representation on the Board should be from their side. In each of the committee from Hilton Young Commission in 1925 to final RBI Act in 1934, the nature of the Board was seen as highly important.

I have summed up the evolution of Central Board and Local Board from the three volumes of RBI History (1935-51, 1951-67 and 1967-81). It helps us understand how and why we get 21 Board Members of RBI.

Some key points from the summary:

  • In 1925, Hilton Young Committee suggested setting a 15 member Central Board. As RBI was envisaged as a shareholder bank, appointments by both Government and Shareholders.
  • The idea of Local Boards started from giving shareholders from the 5 regions representation on the Board. The fifth region was Burma which was removed later following Burma’s partition.
  • The suggested number of Board Members went to 24 by India Office but finally it was kept at 16.
    • 1 Governor
    • 2 DG
    • 4 Directors by Government
    • 8 Directors by Shareholders
    • 1 Government Nominee without vote
  • Thus the first Board was as follows:
First Board of RBI
Governor 1 Osborne Smith
Deputy Governors 2 James Taylor and Sir Sikander Hyat-Khan
Directors nominated by the Governor General in Council 4 1. Sir Homi Mehta, Kt., Bombay.
2. Mr. A. A. Bruce, Rangoon.
3. Lala Shri Ram, Delhi.
4. Khan Bahadur Adam Hajee Mohammad Sait, Madras
Elected on behalf of the shareholders 8 (1) Bombay register
Sir Purshotamdas Thakurdas
Mr. F. E. Dinshaw.(2) Calcutta register
Sir Edward Benthall,
Rai Bahadur Sir Badridas Goenka,

(3) Delhi register
Khan Bahadur Nawab Sir Muzammilullah Khan,
Sir Sundar Singh Majithia

(4) Madras register
Dewan Bahadur M. Ramachandra Rao

(5) Rangoon register
U Bah Oh.

Government Nominee without vote 1 J W Kelley

 

  • Then post independence, RBI was nationalised in 1949. The number of Board members were reduced to 14. All nominations by Government
    • 1 Governor
    • 2 DG
    • 4 Directors from Local Boards
    • 6 Directors nominated by GOvernment from various fields
    • 1 GOvernment Official
  • In 1955, RBI Act was amended to increase the number of DG from 2 to 3. The third was to look at rural credit.
  • In 1964, RBI Act was again amended and number of DG increased to 4. The fourth was to be vice chair on IDBI Board. Further number of directors from various fields increased from 6 to 10. Thus, total Board became 20.
  • The Government then added another nominee (not sure when) to make total members as 21. This is the figure which stands till date.

There are some other interesting aspects:

  • Role of Local Boards has been contentious since independence. In 1949, Government wanted to abolish them as there were no regional shareholders. But RBI insisted to have them to give inputs on regional banking.
  • In 1955, RBI decided to abolish Local Boards but this was vetoed in Parliament.
  • In 1969 and subsequent, additional powers were given to Local Boards. There are discussions on both sides of the table whether LBs have served their purpose.
  • Thus FSLRC suggesting doing away with local boards is hardly anything new.

In case of Central Board too, the members felt meeting were routine and did not engage the Board members:

While the Central Board was the highest managerial body of the Reserve Bank, most of the agenda items that came up at its meetings were of a routine
and administrative nature, and did not provide much scope for contributing to improvements in policy. Some members of the Board, realizing
that the memoranda and agenda items were not lively and did not have any policy content, privately aired their views to the Governor from time
to time. This was reflected in a note recorded by Governor L.K. Jha on 31 January 1968, where he mentioned that the papers for the Board, although
voluminous, contained little of what might be called points meriting consideration.

The prime responsibility in regard to policies did not in fact rest with the Board; nevertheless, one would hope to keep the Board members
better informed. On 3 February 1970, P.L. Tandon and Bhaskar Mitter, referring to the discussions at the Board meetings, wondered whether steps could be taken to enable the members to contribute more effectively to the deliberations.

The Governor stated that the agenda and papers were prepared after taking into consideration the topics and items in which Directors were interested.
He also mentioned that while attempts were being made to prepare a suitable and relevant agenda for every meeting, a summary record of the discussions
was also being maintained by the Secretary for the Bank’s own purposes, and that the comments and views of the Directors were always
taken into consideration before any decision was taken. While the formal agenda items were of an administrative and routine nature, there were many
notes relating to monetary and credit policy, foreign exchange, etc., that were placed before the Board/Committee, albeit only for information. Professor
K.N. Raj, who was a Director on the Board and who actively participated in the discussions, felt that the Bank was not using its Board. On
many economic policies, particularly budget proposals, the Directors made valuable suggestions which were conveyed to the Minister of Finance. N.A.
Palkiwala, as Director of the Central Board sent his comments to the Governor (L.K. Jha) on many budget proposals.

Finally, those who think Boards could oppose a government decision have some precedent. During the incident of Benegal Rama Rau resignation in 1956,, Central Board members expressed their dissent:

In 1956, as stated earlier, a controversy arose when Governor Rama Rau submitted a memorandum to the Central Board against the hike in stamp
duty proposed in the central budget by the Finance Minister, T.T. Krishnamachari, as a fiscal measure with monetary intent, the entire Board,
opposing the proposal, passed a resolution against it. The Ministry of Finance and even the Prime Minister took strong exception to such a resolution,
and asked for of the memorandum and of the proceedings. The  Governor replied that there was no system of keeping a record of the discussions
of meetings of the Central Board.

After taking over as Governor in 1957, Iengar suggested that it was necessary to maintain a brief record of discussions (if, necessary separately) at
Board meetings on important subjects like credit policy. He felt that it was, in fact, the most important subject that the Board had discussed, and it was
essential that a record of the discussions be kept. In 1967, when M. Narasimham became the Secretary after reorganization of the Secretary’s
Department and he was required to attend Central Board and committee meetings, he started the practice of recording fairly detailed proceedings of
the Board meetings for the benefit of posterity.

Further, Mr. Purshottamdas Thakurdas who fought a lot for Indian representation on Board and was a Board member since 1935 resigned during the 1956 conflict:

On many occasions, Directors of the Central Board of the RBI and members of the local boards resigned, for a variety of reasons. A noteworthy
example was the resignation of Sir Purshottamdas Thakurdas (Sir PT, as he was fondly called), who had been a Director of the Central Board since
1935 and also chairman of the western area local board in 1956, when there was a clash between Governor B. Rama Rau and Finance Minister T.T.
Krishnamachari. The clash led to the resignation of Governor Rama Rau on 13 January 1957, an issue that was elaborately detailed in Volume 2 of
the history of the Reserve Bank of India. The Finance Minister had made a public statement that the Reserve Bank was only a department of the Finance
Ministry, to which Governor Rama Rau reacted by resigning. This incident led to the resignation of Sir PT as well. In a letter addressed to the
Reserve Bank, Sir PT stated:

The happenings in the last couple of weeks in the relations between the Board of the Reserve Bank and the Central Finance Ministry are so extraordinary, one-sided and unprovoked that I feel it is not in the interest of the country that any non-official should avoidably keep up his connections with the Reserve Bank. I, therefore, hereby request you to do the needful so that I may not be renominated after what has been happening lately.

Fascinating.

So it is a mixed record. The Board was seen as very important early on and then gradually lost its eminence as executive members gained prominence. Having said that, the Board continued to enjoy the services of Who’s who of industry and academia for most part of its history. Above all, they were not consulted as much but the members knew when to sting as well.

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