Time up for the BBB? FINGER ON THE PULSE

Do we need the Banks Board Bureau (BBB) headed by Vinod Rai anymore? The question is prompted by the setting up of a committee to appoint chiefs of four state financial institutions, IIFCL, IFCI, SIDBI and the Exim Bank.

The BBB was set up in April 2016. Its principal task was to select heads of public sector banks (PSBs) and financial institutions. Other tasks were advising PSBs on strategy and helping them formulate “innovative” capital-raising plans.

The principal task has now been whittled down. The heads of the four financial institutions will be appointed by a committee headed by Anjuly Chib Duggal, secretary, financial services, at the Ministry of Finance. The other members of the committee are Reserve Bank of India (RBI) Deputy Governor N S Vishwanathan, Allahabad Bank’s former chairman Subhalaxmi Panse, consultancy firm IndAsia’s promoter Pradip Shah, and IIM-Indore director Rishikesha T Krishnan.

Ms Duggal and Mr Vishwanathan are both members of the BBB. Ms Panse and Mr Shah were added recently. Prof Krishnan is not a member of the BBB. Mr Rai and three other members of the BBB, Anil K Khandelwal, Roopa Kudva and H N Sinor, do not figure in the new committee.

The BBB was one of the recommendations of the P J Nayak committee on governance in banks (May 2014). But the BBB that was created by the National Democratic Alliance government was not the one the Nayak committee had intended. The Nayak committee had wanted the BBB to be completely distanced from the government. It had also wanted the BBB to appoint chairmen, managing directors and independent directors at PSBs.

None of this happened. The BBB included the financial services secretary as well as a deputy governor of the RBI. It was, in fact, the original appointments committee that used to select bank chiefs by another name, except that the RBI governor had been replaced by Mr Rai as chairman. The BBB has selected bank MDs and executive directors but not chairmen and independent directors.

Even in respect of MDs, the BBB has not had full authority. The Indian Bank MD exchanged places with the MD of IDBI Bank without the BBB being consulted. Two individuals, whom the BBB had selected for the Allahabad Bank and the Syndicate Bank, were appointed by the government to the Punjab National Bank and the Bank of India instead. One of the BBB members, Mr Sinor, resigned in protest. He was persuaded to stay on.

There has not even been a pretence of the BBB being involved in matters of bank strategy or capital raising. The non-performing assets (NPAs) issue is in the court of the RBI. Given that the BBB’s mandate has now been narrowed down even further, it’s worth asking whether we need the BBB any more.

The BBB is a terrible idea. The notion that top appointments at PSBs can been outsourced to some “independent” committee of professionals is sheer nonsense. Since the government is accountable to Parliament for PSBs, it must accept full responsibility for top appointments. Let a government official Monetary policy tantrums The announcement of the latest monetary policy statement earlier this month was not without drama. Prior to the meeting, the Chief Economic Advisor (CEA), Arvind Subramanian, had proposed a meeting with the Monetary Policy Committee (MPC) in order to put forward the government’s point of view. The committee declined.

By a majority of 5-1, the MPC decided to maintain the status quo on the policy rate. Mr Subramanian did not disguise his displeasure. He said there was a “plausible alternative macroeconomic assessment” that dictated a cut in the policy rate. Mr Subramanian remarked acidly, “Inflation forecast errors have been large and systematically one sided in overstating inflation.” The media promptly went to town about another RBI governor being at odds with the government.

Who’s right — the CEA or the RBI? The RBI says that it’s not clear whether the factors that have contributed to the current low rate of inflation are transitory or persistent. It would like to wait and watch until it’s clearer that inflation will stay below 4 per cent. The CEA may think otherwise but he can’t argue that the RBI’s position has no basis. Differences of this sort are impossible to resolve.

The argument the CEA should be making is that the mandate given to the MPC is an inflation rate of 4 plus or minus 2 per cent. So the RBI need not be fixated on a target of 4 per cent. You can’t be sure that inflation will stay below 4 per cent but you can be a lot surer that it will stay below 5 per cent. On the latter view, a rate cut would certainly be on. Why the CEA has not made this argument is a bit of a mystery.