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Subir Roy: Let a few national banks remain

Subir Roy 

Subir Roy

The report of the P J Nayak committee, at the behest of the banking regulator, the Reserve Bank of India (RBI), on the governance of Indian banks has made sweeping recommendations for the ownership of public sector banks so as to rid them of the deficiencies that lie at the root of their deteriorating performance.

The key recommendation is that the government should transfer its holdings in these banks to a bank investment company (BIC) and bring down these holdings to under 50 per cent so that they fall out of the purview of the government's anti-corruption machinery, the Right to Information Act and restrictions on remuneration. The BIC will act like a passive wealth fund for government holdings with the sole aim of maximising the government's returns.

The non-executive chairman and chief executive officer (CEO) of the BIC will be nominated by the government and all other directors will be independent. The BIC, in turn, will professionalise and empower bank boards, which will then appoint independent and whole-time directors - including bank CEOs. In order to enable all this, the State Bank of India (SBI) Act, the State Bank of India (Subsidiary Banks) Act and the two bank nationalisation Acts will be repealed. It has also been recommended that banks come under the Companies Act and be subject to the listing requirements of the Securities and Exchange Board of India.

All this sounds quite nice, but will it improve things? The problem with public sector banks, as with the entire public sector, is that the long arm of the political executive exercises its influence in management matters through a pliant civil service (it also has its own agenda). This makes for lack of professionalism in management as well as no concern for the bottom line.

There is no reason to suppose that simply by creating an extra layer - that is, the BIC - bank managements will become more professional and be left alone to do their own thing. If a phone call comes to a bank's chairman and managing director, or CMD, today, it can continue to do so even though he is not appointed by the finance ministry but by the BIC or a BIC-appointed board. Crucially, the BIC board will be appointed by the finance ministry.

On the other hand, under the system proposed, there is the risk of even less accountability, given that bank officials will not need to fear the government vigilance system being on their back. In the absence of the supervision of the Central Bureau of Investigation and the Central Vigilance Commission, it is essential to have a private promoter shareholder who is left to hold the baby, that is, privatisation.

On the key issue of the developmental functions of public sector banks, the committee recommends that such activities be supervised by the RBI in consultation with the government. There is a case for extensive privatisation and merger of public sector banks, but the issue is whether we should go the whole hog. Nationalisation of banks, beginning with SBI and then of others from 1969, has a history and has served an indisputable developmental purpose. It has vastly expanded the public's access to banking, financed small and medium industries and transformed the nation's savings rate. The government has also used SBI to raise foreign exchange from international markets during the balance of payments pressure points. There is a case for a national company or two among banks to serve overriding strategic interests of the nation. Also, isn't it time the RBI stopped wearing dual hats - regulatory and developmental?

Over and above, after the global financial crisis of 2008, in which private developed-country banks that were too big to fail had to be bailed out, there is a case for treating the financial sector differently from the rest of the economy. The financial sector is too important to be left entirely in the hands of the animal spirits of capitalism; even a "maestro" like Alan Greenspan, former chairman of the US Federal Reserve, got things badly wrong. Much of the oversight has to be exercised by the banking regulator. At the same time, if we are to assume that in an economy at India's stage of development the government and the regulator have to work hand in hand, there is a case for persisting with a few very large public sector banks of global scale, which can and will provide crucial support to the requirements of large infrastructure projects - a bit beyond the call of the bottom line - and the global operations of leading Indian firms.

There is, in particular, a strong case for treating SBI differently from the subsequently nationalised banks. The bank has enjoyed better governance and less interference. Banks like Bank of Baroda, Bank of India and Canara Bank are established brands. Smaller public sector banks that have little going for themselves can be taken over by bigger players - public or private - and a few large national companies among banks can remain in the public sector, as they are today. A BIC is neither here nor there.

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First Published: Tue, June 17 2014. 21:44 IST