NEW DELHI: The central bank wants to pull out its nominees from the boards of state-owned banks over possible conflict of interest – it’s the banking regulator – but the move may have been prompted by government criticism over bad loans at United Bank of India.

Financial services secretary Rajiv Takru had said that the Reserve Bank of India should have reacted more quickly to issues plaguing the lender. “Their (RBI’s) nominee director should have been wide awake,” he had told a newspaper.

The central bank has written to the government seeking to withdraw its representatives from the boards of state-run banks, said an official requesting anonymity.

“RBI has told the government that the practice of nominee director of RBI on bank boards leads to conflict of interest and moral hazard issues and should be dispensed with,” the person said. RBI had decided to withdraw its nominees from the boards of private sector banks in 2005, also citing possible conflict of interest. The Committee on Banking Sector Reforms, popularly called the Narasimham committee, had also suggested that RBI relinquish seats on bank boards. As for state-owned banks, the central bank opted to appoint retired RBI officials to the board in 2007-10 but then switched back to nominating serving officers.

The RBI communication to the finance ministry seems to have been made around the time Archana Bhargava resigned as chairperson and managing director of Kolkata-based United Bank amid a surge in bad loans at the lender. “These are some issues which have been flagged by the Reserve Bank. We are in discussions and it is too early to derive conjectures out of RBI’s observations,” said a senior government official who spoke to ET on condition of anonymity. But a senior RBI official told ET that there are serious differences between the central bank and the government on governance issues in public sector banks (PSBs).

“We have already pointed out that ‘fit and proper criteria’ have not been laid down for appointment of top executives in PSBs,” the RBI official said, adding that the process is not at par with what is laid down by RBI for private sector banks.

The official added that some of these observations have also been mentioned in RBI’s paper on management and governance issues in public sector banks.

Former financial services secretary DK Mittal approved of RBI’s move. “All existing RBI nominees should resign as the government, under the existing law, has to appoint RBI’s nominees on bank boards,” he said, adding that a regulator should not be on the board.