As Vinod Rai-led banks' bureau demits office, its future remains uncertain

The Banks Board Bureau started out with an ambitious mandate to reform PSB governance but found itself reduced to an appointments board. Here is how

The first stint of the Banks Board Bureau (BBB) came to an end with its chairman Vinod Rai and other members demitting office on March 31. Despite initial reports that the BBB would be scrapped, the government has categorically said it would continue. 

But the ambivalence of the government’s approach has been underlined by the fact that a new board and office-holders are yet to be reconstituted even as uncertainty hangs over its precise function within the eco-system of public sector banks or PSBs. Indeed, 10 days before the BBB’s two-year debut stint was supposed to end, Rai, former Comptroller and Auditor General of India, made public a “Compendium of Recommendations” that listed the problems the institution faced and the future role it sought from the government.

The latter is particularly interesting given the debate that has erupted about poor governance standards in PSBs following the Rs 139-billion fraud detected at Punjab National Bank with jewellers Nirav Modi and Mehul Choksi. Indeed, BBB's formation was set against the urgent need to draw a distinction between government ownership and management of PSBs with a larger focus on governance.

The bureau became operational in April 2016 and was constituted by the National Democratic Alliance (NDA) government following recommendations by a committee headed by veteran banker P J Nayak to review the governance of PSBs. 

Announcing the move to form the BBB during his Union Budget speech in February 2015, Finance Minister Arun Jaitley had said it would be “an interim step towards establishing a holding and investment company for banks” – a key recommendation of the Nayak committee.

But the BBB did not seem to have taken even this “interim step”. When it held its inaugural meeting, which was addressed by the then Minister of State for Finance, Jayant Sinha, and the then RBI Governor, Raghuram Rajan, it emerged that the initial terms of reference were “nebulous”, Rai said in his latest report.

So the bureau decided to submit revised terms of reference for itself and sent it to the Department of Financial Services (DFS) in the finance ministry. By November, the BBB founds its wing clipped when the DFS did not agree to some of its demands. These included allowing the BBB to place the recommendations for board-level appointments in PSBs directly before the Appointments Committee of Cabinet (ACC), instead of referring to the Ministry of Finance first; appointing non-official directors on PSB boards; developing a roadmap for the transition of government shareholding in banks to a holding company; and playing a role in stressed asset resolution.

In fact, the DFS went against the Nayak committee’s recommendations that the BBB should advise the government on all PSB board appointments, including those of the chairman, executive directors and non-official directors.

“The present mandate of BBB is half-hearted and constrained. It should be an empowered body rather than a recommendatory one. If the government accepts that the management and ownership of public sector banks should be distinct, the mandate of BBB should reflect that,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services.

Some experts also said it is unclear whether the BBB was able to fulfil its present role of appointing senior members on PSB boards. “The decision to appoint Sunil Mehta as Punjab National Bank chief and shift Usha Ananthasubramanian to take charge of Allahabad Bank last year was taken by a committee of bureaucrats formed by the finance ministry. It is not clear what role BBB played in their appointment,” said a banking analyst on condition of anonymity.

Public sector bank executives said the BBB held a series of meetings with them on various issues concerning the industry but ultimately its role was limited to the appointment of senior board members.  

“The bureau has largely had a say in senior level board appointments so far. However, we feel there is a scope for widening the mandate of the BBB. It can play the role of a regulator in some sense,” a chief executive at a Mumbai-based public sector bank said, requesting anonymity.

With the BBB essentially in search of a role, Rai wrote the finance minister a letter in July 2017 stating that the body was “merely functioning as an appointment board”. Complaining that many of its recommendations were still pending for action at the ministry, he demanded an “organic relationship between the BBB and the Finance Ministry”.

The letter also highlighted the future role that BBB sought for itself. Among various things, the BBB had asked for roles in consolidation of public sector banks, a mechanism to engage with the banks’ boards directly, provide “independent feedback” to the finance minister twice a year on the degree of implementation of governance reforms in banks, and to create a strategy on asset quality resolution.

So what should be the future role of BBB? Finance Ministry officials feel that the BBB cannot be tasked to perform the job of a regulator since that will cause an overlap of authority with the Reserve Bank of India (RBI).

“The BBB’s recommendations on its future role are more of a wish list. It’s understandable that it wants a greater mandate and reforms are the need of the hour but it has to be sequential. The BBB’s role was to strengthen the board of banks and within its present mandate, it has done well,” R Gandhi, former deputy governor, RBI said.

In its second stint, Gandhi added, the bureau should be allowed to select the non-executive directors on PSB boards. Vinod Rai, in his report, demanded recommending termination and extension of services of government appointees and nominees on boards of PSBs. At present, 14 officials from DFS, six from department of economic affairs and one from the department of revenue are on board of 21 PSBs. Some finance ministry officials are even on the board of private sector banks, including ICICI Bank.

The Nayak committee had envisaged strengthening the PSB boards in three phases. In the first phase, BBB would advise on all board appointments for three years, followed by formation of a holding company for banks that will take over that role in the second phase, and in the third phase, PSB boards would select their top management. 

With the government silent on the creation of a PSB holding company, the finance minister insists that the BBB is working well within its present mandate. But 10 days since the end of its first term, there is no clarity on who will be part of the new bureau. That in itself says something about its importance.