A chronicle of banking reform

Reforming the Indian Public Sector Banks 

The Lessons and the Challenges 

T R Bhat

Gyan Publishing House

346 pages; Rs 1,150

It is not very often that we find retired bank officers writing about the banking sector as a whole with a large canvas. There is something special about this book. T R Bhat, the author, had a career in a mid-sized public sector bank — Corporation Bank. During his active service, Mr Bhat was, for the most part, an office bearer in the officers’ union. He even served on the board of his bank as a representative of the bank officers. He has authored a book in Kannada that chronicles his life as a union leader, the role of the unions and how the functioning of bank unions has developed. The title of that book is quite evocative — From Conflict to Harmony — indicating how the relationship between the unions and the bank managements has evolved.

So, when Mr Bhat writes about reforming the state-owned banks, it is natural to expect that his vantage point would be that of the bank employees. Surprisingly that is not the case. Mr Bhat is able to shed all his baggage as a career union activist and look at the issue of banking in an objective frame, using data, notifications and policy guidelines to paint a picture of the evolution of public sector banks. Having done this, he then looks at what could be done to reform the banks.

The book briefly looks at the years before the period of economic liberalisation, understanding the need for nationalisation, defining the social objectives that the state-owned banks were serving. He chronicles how some of these initiatives possibly led to the internal weaknesses of the banks. One aspect that the book clearly brings out is the issue of ownership and how it affected the governance and management of the bank. The structure of ownership defined by the Bank Nationalisation Act makes several prudential aspects somewhat redundant. However, Mr Bhat weaves into the story changes that in the larger regulatory ecosystem, including in the international arena -- particularly the Basel norms -- to analyse how it is affecting the performance and outlook of the Indian banks. He deals with some of the darker sides of the banking system to highlight the vulnerabilities.

Mr Bhat then devotes much of the attention to the multiple phases of reforms looking (almost) chronologically at the incremental reforms in the banking sector. As we read the book, it is clear that while the intellectual argument — starting with the Narasimham committee of 1991 and 1998 all the way up to the Raghuram Rajan committee as well as the P J Nayak committee — really had big bang ideas on changes to the banking system. However, the actual reforms took place in smaller incremental steps. That is possibly why many of the recommendations made by the Narasimham committees in 1991 and 1998 are still open and appear to be relevant even today. Those recommendations have found much resonance in the intellectual arguments in the later days also. However, these have never been acted upon in any significant manner.

Mr Bhat’s meticulous documentation would enable an interested academic to go back to the recommendations of the committees from Narasimham to Nayak and check off the ones that have been implemented. The three large arguments that are left completely un-attended are: (a) repeal of the Bank Nationalisation Act to bring all the banks under the common Companies Act and move towards greater market accountability; (b) a move towards private ownership; (c) consolidation of the banking system through a few large-scale mergers. Mr Bhat seems to subscribe to the idea of greater market accountability but appears ambivalent about both privatization and consolidation. I guess this is where Mr Bhat subtly wears the union hat to look at the trade-off between efficiency and job losses. Both privatisation and consolidation are, therefore, not ready solutions; and they certainly do not offer any alternatives to the agenda of social banking.

The book does not offer any radical solutions for reform and, therefore, the agenda for reform continues the thought process that is embedded in the intellectual arguments in the banking sector. There are two elements that might have helped Mr Bhat build his arguments for reform. Alas, both are missing. The first would be to evaluate the role of the private sector banks in the post-liberalisation era to see how they have done on key efficiency parameters and whether they had any impact on the function of social banking. The second would have been to examine the consolidation process in Regional Rural Banks to see whether that consolidation could be used as a test case for the intellectual argument on mergers. An analysis of both would possibly have helped Mr Bhat in his arguments.

It is refreshing to see someone who has spent a lifetime in being an office bearer in the union movement to look at the governance and management of banks dispassionately and constructively. To that extent, this book is a refreshing addition to the literature on banking.

The reviewer is faculty member, Centre for Public Policy, Indian Institute of Management, Bangalore

mssriram@pm.me