A two-day Gyan Sangam or Bankers’ Retreat was arranged by the Finance Ministry in Pune recently. Apart from top executives from public sector banks (PSBs), insurance companies and financial institutions, senior Finance Ministry officials attended the meeting. Finance Minister Arun Jaitley, Minister of State Jayant Sinha, and Reserve Bank of India Governor Raghuram Rajan, participated in the meeting, whose high-point was the address by the Prime Minister, in which he categorically promised bankers that there would be no government interference in the functioning of banks. The government has quickly backed the PM’s assurance by sending out letters to banks on those lines.
The interaction of ministry officials, RBI Governor and heads of PSBs in an informal setting is a novel idea that is to be welcomed. As a management tool, a meeting away from the pressures of day-to-day work is meant to unfreeze the established behaviour patterns and enable the divergent shareholders — the government, owner, regulators and the banks themselves — to open a healthy dialogue. Reports on the meet are scarce, but whatever information that is available suggests a healthy awareness on the part of bankers and government officials alike of the burning problems that banks and policymakers alike face.
These can be summed up in three words — recapitalisation, consolidation and professionalisation of bank boards and their management. The government, as the majority stakeholder, has an overarching role in the functioning of PSBs, which, despite the entry of many new generation private banks since the 1990s, continue to have the largest share of commercial banking business in the country.
The crux of the problem — and this, in fact, ought to have been the underlying theme at the retreat — is for the government to draw a fine line between exercising the rights of majority shareholders for the common good and interfering in the business of banks, which is mutually ruinous. The question then arises as to whether it is possible at all for the government to stop interfering while remaining a majority shareholder.
Benefits of govt. ownership
In the broadest sense, a majority government ownership by itself is not such a bad thing. On the contrary, it confers a number of benefits to the banks. A government stake, even a minority one, lends heft to a bank whose balance sheet has been weakened by circumstances. A majority stake can be a saviour. This has been amply proved in India — in the 1990s, Indian Bank, whose balance sheet was devastated through some reckless lending, retained its depositors’ confidence mainly because it was owned by the government. The Unit Trust of India’s flagship scheme, US 64, could be wound down without facing a run because of government ownership. To big banks and institutions in the West, the State has acted as saviours during the more recent financial crisis, lending money and more importantly assuring all stakeholders of unlimited support. Not surprisingly, some of them continue to be technically government-owned till today.
The key issue before the PSBs is, therefore, to draw on the strengths of existing government stake, while simultaneously striving towards a more commercial orientation. Several approaches have been contemplated over the years. Outright privatisation is simply ruled out, although several trade unions, among others, see in the current reform initiatives a sinister move towards backdoor induction of private sector. Yet, banks require a humongous amount of money to stay capitalised — some Rs.2.4 lakh crore — and meet the international regulatory norms conforming to Basel III requirements. The government, which has been making budgetary allocations, will not be in a position to do so. So, the challenge is to find non-government sources, which again means demonstrating a more commercial orientation. Consolidation in the banking industry may happen but over a long period. At the recent retreat, this idea has not found many takers among PSBs. Individual banks, therefore, have to spruce up their governance to stay in the race.
Governance, the key
It is in such a context that the report of the P. J. Nayak Committee on governance in banks was discussed. The report has a number of useful suggestions relating to the composition of bank boards, appointment of chief executives and their tenure. PSBs are subject to dual regulation — from the Ministry and the RBI. By far the most discussed proposal is to have a separate holding company (Bank Investment Company or BIC) in which the government’s shares in these banks will be vested. The holding company will monitor the performance of PSBs, make suggestions to improve governance and act as a buffer between them and the government and help in raising additional capital. At the Pune retreat, PSB heads had reportedly agreed to prepare an action plan to implement some of the key proposals of the Nayak panel. The objective is to confer greater autonomy on the PSBs to enable them to function on commercial lines. Despite the good intentions, it is unlikely that some or all these recommendations will be implemented soon. Successive governments, including finance ministers, have been aware of the malaise that afflicts the public sector and have, in fact, strongly argued for removing the constraints, for instance, decision making by banks. Yet, no appreciable change has taken place over the years. It is naive to think that the Gyan Sangam will spur change anymore than what finance ministers, past and present, have been able to do. Nevertheless, it ought to be viewed as a good beginning.
(This article first appeared in The Hindu dated January 12, 2015)