A half-hearted attempt

Banks Board Bureau has been made irrelevant

Even though India’s public sector banks, or PSBs, continue to dominate the banking sector, they have been going through a severe bad loans crisis caused primarily by poor governance. The government has taken some steps towards reform, including the formation of a Banks Board Bureau headed by former Comptroller & Auditor General Vinod Rai. The Bureau was entrusted with the task of choosing the top leadership of PSBs and improving governance norms. As such, it would, if properly empowered, have been an important step towards increasing PSBs’ independence and raising their level of competence. However, it is now becoming clear that the Bureau is largely toothless. Given its ineffectiveness, and in the absence of any other indication that the government truly wishes to increase PSBs’ independence, it is not clear why the Bureau still exists. It might as well be shut down.

The Bureau was a half-hearted attempt to implement the recommendations of the P J Nayak Committee, which had been set up to examine how the functioning and governance of PSBs could be reformed. The main recommendation of the Nayak Committee was to move towards a holding company system, to separate the day-to-day governance and supervision of the banks from the concerns of their ultimate owner, the government. As a first step towards that end, the Banks Boards Bureau was suggested. The Bureau when it was eventually formed did not have the power, as the Nayak Committee had suggested, to oversee all senior appointments, including board-level choices. It was reduced essentially to recommending names of the heads of PSBs and financial institutions. Later, even the latter power, to choose the heads of institutions such as IIFCL, IFCI, Sidbi and Exim Bank, was taken away from it and given to the finance ministry.

Subsequently, there have been several instances of its recommendations being simply ignored by the government. Rather than going to the Cabinet for approval, its recommendations are re-scrutinised and sometimes overruled by the finance ministry. Its incomplete control over the choice of members of bank boards is also clearly visible. Some new members of boards — “non-official directors” — are also members of the ruling Bharatiya Janata Party, which calls into question the whole attempt to depoliticise the functioning of PSBs. Other recommendations from the Bureau, such as over the pay of senior PSB executives and an attempt to aid in the resolution of stressed assets, have not met with approval from the finance ministry.

The government began the process of PSB reform with some energy, convening meetings of bank heads and launching the so-called Indradhanush reform programme. However, this has not been followed up by any real action. The one thing it could point to as an improvement, the Banks Board Bureau, has been rendered irrelevant. The government needs to either come up with a real road map for PSB independence and reform or stop pretending that it is making the attempt — and shut down an increasingly irrelevant Banks Board Bureau.