FICCI-IBA Banking Conclave. Public sector banks should not be seen ‘as an extension of the Govt’

Making a strong pitch for independence of public sector banks (PSBs) to make commercial decisions, RBI Governor Raghuram Rajan on Monday said they should be seen as independent entities and not as an extension of the government.

The Governor further said the government’s mandates on social sector should be backed by financial payments.

Pointing out that PSBs also have private shareholders and are no longer an extension of the Government, Rajan, said they should be seen as independent entities. He spoke at the inaugural session of the annual FICCI-IBA banking conclave.

While PSBs are there to undertake social actions, those mandates should be backed by financial gains, he added. The Governor’s observations on independence of PSBs are significant as the Finance Ministry is perceived as pulling the strings in these banks where the Government is the majority stakeholder.

The RBI, according to Rajan, is in dialogue with the Government for implementing governance reform, as recommended by the central bank-appointed PJ Nayak Committee, in PSBs.

Among others, the Nayak Committee recommended splitting the position of Chairman and CEO in PSBs; giving the CEO longer tenure; changing the appointment process and talent pool for the management and boards of PSBs; and strengthening the board’s powers and allowing it to hold the management accountable.

The committee further suggested that focus of PSB boards should be on important issues; board members should be compensated adequately; and development of human resources through pay, incentives, and skill building.

Pointing out that non-performing assets (or bad loans) have increased in public sector banks, Rajan said significant portion of such loans are in large infrastructure projects.

Bad economy, poor structuring (of loans), and slowdown in government have also led to increase in bad loans.

Referring to allegations of malfeasance (Syndicate Bank), the Governor said there is a need to root out bad apples, bad practices, and weak capabilities. However, he emphasised that there were lots of good people in PSBs.

Problems that have emerged in recent bank scandals were due to “outsourced project evaluation”.

The recent scandals call for better internal evaluation of the lending process. Banks must move towards more engaged and informed banking, Rajan said.