Governance gaps

Govt must not delay PSB appointments

Often there are gaps between expectations and actual outcomes. If such gaps emerge in the business of banking, there can be financial-stability risks, with implications for the entire economy. It is thus crucial that the banking regulator is always alert and checks deviations from the given regulatory framework. In the process, it also needs to be careful to not stifle innovation and technology adoption. The Reserve Bank of India (RBI) was deemed responsible, in part, for the build-up of non-performing assets (NPAs) in the banking system in the aftermath of the global financial crisis. It seems to have learned from the crisis and has been working on improving the supervisory process to identify and deal with stress in time. In an interview with this newspaper, for instance, the outgoing RBI deputy governor, M K Jain, highlighted how banking supervision had evolved.

The focus of the RBI has now become more forward-looking. Thus, instead of just identifying the gaps, the regulator now aims to address the basic cause of the problem in a timely manner. The RBI now depends more on data analytics tools. It further intends to expand the scope by analysing information from news reports and social-media posts. The regulator is also said to have increased two-way communication with stakeholders in the banking system. More importantly, it is building human-resource capabilities to improve the supervisory function. With such intent and initiatives, it is to be hoped that potential stress in the banking system will be detected and addressed in time. It is now well known that the banking system takes a significant amount of time to recover from stress, which affects the flow of credit to the productive sectors of the economy and impedes growth. Any build-up of stress should thus be avoided with best banking practices and an appropriate level of regulation.

However, despite the best regulatory intent, India faces significant risks because of the domination of public-sector banks (PSBs). Not only does the regulator have limited powers in this respect compared to how it deals with private banks, but there are also often issues related to governance in PSBs, which can create risks. As reported by this newspaper on Thursday, six PSBs, for example, do not have a non-executive chairman. In some cases, the position has been lying vacant for over two years. In fact, two PSBs never had a non-executive chairman since the process of splitting the position of chairman and managing director started in 2015. Further, PSBs have few independent directors. Notably, in an address recently, RBI Governor Shaktikanta Das talked about the expectations from the board of directors of banks. But if bank boards do not have the required number or kind of directors, governance is bound to suffer in the medium to long run.

Poor governance and lending standards contributed significantly to the accumulation of NPAs in the last decade. Although the issue of government interference in lending decisions seems to have been addressed, the present National Democratic Alliance government has not been able to tackle the legacy problem of delayed appointments to key positions in PSBs. From both operational and governance standpoints, it is important that key positions are not allowed to remain vacant. In this context, it is also worth noting that the government should work towards eliminating the regulatory difference between PSBs and private banks. It would help minimise risks and improve resilience in the banking system.