Consolidation should not be forced by BBB, govt: Krishnamurthy Subramanian

Interview with Panel member, P J Nayak Committee

The P J Nayak Committee report provided draft legislation for setting up a holding company for all PSU banks, says panel member Krishnamurthy Subramanian , who teaches at ISB. He says any delay in setting it up should be avoided. He tells Indivjal Dhasmana  that even though the government has not said anything about the panel’s recommendation on proportionate right of voting to shareholders, it would be follow-on step in the long run.

There are many recommendations of the P J Nayak panel which have been accepted by the government in its Indradhanush strategy. Do you think it would ensure the ultimate objective of limiting the government concern only to earning return on investment?

Indradhanush epitomises a change in mindset from viewing the public sector banks (PSBs) as a (political) arm of the government to viewing them as commercial enterprises that can really help fulfil the government’s goals when empowered. Therefore, if taken to their logical conclusion through the setting up of the bank investment company that enables the government to govern PSBs at arm’s length, these changes would not only enhance the government’s return on its investment, but also enable the government to pursue its social goals better.

There is apprehension that there would be inordinate delay in the formation of holding company — Bank Investment Company — as various laws need to be amended. Will this impact the effectiveness of the proposed move?

This is a really crucial step that must be expeditiously implemented. The Bank Boards Bureau (BBB) was intended by the committee as only an interim step before the government hands over key governance roles to the Bank Investment Company. In the report, we have provided draft legislation as well in order to expedite the process for setting up of the Bank Investment Company. Any delays in setting up of the Bank Investment Company should be avoided.

Do you think BBB would be able to nudge and prod PSU banks to consolidate, as the government is hoping?

The role of the BBB, as envisaged by the committee, was to undertake recruitment of top management for the PSBs. While informally they may be able to suggest merger, acquisition proposals to the top management for the PSBs, it should be up to the individual bank’s senior management to make these decisions. Neither the government nor the BBB must force these decisions upon an individual bank’s senior management to avoid instances such as the Air India-Indian Airlines merger, which created several knotty problems that took a long time to sort out.

There is no word about the proportionate right of voting to shareholders, as the panel wanted. Do you think a panel recommendation on this should have been accepted?

In terms of the sequencing of reforms, setting up of the Bank Investment Company is the most important. Proportionate right of voting to shareholders would be a follow-on step that is not as crucial now. However, it is important in the long run. With banks now publicly listed with minority shareholders, and with competition from the PSBs, keeping the management in check can no longer be the predominant governance objective.
 

The government had stated that private sector professionals would not be considered for vacancies of top posts in public sector banks that are coming up. Does this water down the entire move of increasing efficiency of PSU banks?

There is no dearth of talented people in public sector banks. As long as good people are recruited to fill the vacancies of top posts in public sector banks that are coming up, I don’t think there is any watering down. In any case, the use of ESOPs and performance linked bonuses would provide strong incentives for the top management to work towards enhancing the key performance indicators of their bank.

Crisil in its report said the move lacks surgical response to tackle NPAs and the government should have set up bad bank. Do you agree?

The current proposals primarily help to put in process the structure to avoid problems in the future. However, tackling the current problem of NPAs needs complementary steps, including the setting up of a bad bank.

What is the role of research in the Nayak panel report? Is it crucial for any report on policy-making?

The acceptance of all the major recommendations of the P J Nayak committee by the government relates crucially to the fact that the report combined clarity of thinking with a good sense of ground realities. While the ground realities were provided by the various experienced members of the board, the clarity of thinking as well as the report’s ability to persuade the policymakers stemmed from the amalgamation of (i) diligently gathered empirical evidence and (ii) carefully crafted conceptual arguments that were based on cutting-edge research. The acceptance of the report provides the insight that policy-making reports that are guided by rigorous academic research are more likely to persuade and thereby have an impact.