Chasing rainbows

Banks Board Bureau is conspicuous by its inaction

As the government readies its plans for Indradhanush 2.0, it is worth wondering about the functioning of the Banks Board Bureau (BBB). The BBB, an autonomous entity, was a key element of Indradhanush 1.0, a seven-point programme announced in August 2015 to revamp the functioning of the public sector banking system. The BBB’s ambitious mandate includes appointing bank chiefs and senior officers, suggesting mergers and acquisitions, advising banks on innovative financial methods to raise capital, and putting in place a governance and accountability framework for India’s 27 state-owned banks that account for almost 74 per cent of the country’s banking activity. But since it started functioning in April 2016, the six-member BBB, headed by former comptroller and auditor-general Vinod Rai, has been conspicuous by its inaction. So far, it has recommended nine names as executive directors at various banks but has done little in terms of fulfilling the other critical elements of its mandate. At an industry meet in February, Mr Rai said managing directors of public sector banks should be appointed for a six-year term and employees be given higher pay and perks. Meanwhile, the chronic problem of non-performing assets (NPAs) has worsened. 

Between March and September 2016, NPAs almost doubled to 9 per cent of total advances over the comparable period a year ago. Public sector banks account for four-fifths of this and their NPA ratio is a staggering 12 per cent. The BBB’s role was considered a critical adjunct to the hefty Rs 70,000 crore that the government had earmarked to recapitalise public sector banks over four years. The government has already paid out Rs 25,000 crore in 2015-16 and has earmarked a similar amount for 2016-17, 75 per cent of which has been paid out. For the next two financial years, the government has set aside Rs 10,000 crore each. This total amount, however, is less than half the amount these banks require to align with global risk norms (known as Basel-III) assigned by the Bank of International Settlements, but Finance Minister Arun Jaitley had said banks would have to raise the remaining Rs 1.1 lakh crore from the markets. This figure looks unrealistic by any yardstick; without deep-rooted reform, the task is impossible. 

The BBB’s weaknesses are, however, essentially institutional. It is a part-time, interim body, until the setting up of the Bank Investment Company (BIC), a holding company for state-owned banks, as recommended by the P J Nayak committee report of 2014. Clearly, then, the process to set up BIC needs to be hastened, preferably ahead of the end of the two-year asset quality recognition exercise in March 2017. The BBB is also hamstrung by such obstacles as the need for Parliament to amend various Acts to enable the government to reduce its shareholding below 51 per cent in some major banks, and the poor incentives for bank chiefs to write down loans under the BBB’s oversight committee for fear of attracting the attentions of myriad investigative agencies. These are, of course, age-old problems confronting public sector banks; unless they are addressed on a war footing, Indradhanush 2.0 will turn out to be just another recapitalisation programme in which the government will be throwing good money after bad.