Does Any­one Re­mem­ber Big Bank­ing Re­forms?

A long list of for­got­ten re­forms is it­self becoming a non-performing as­set for the bank­ing sec­tor

The Economic Times - - Front Page -

may prove to be path-break­ing on sev­eral fronts. How­ever, an im­por­tant con­cern is the pe­riph­eral at­ten­tion given to re­viv­ing the bank­ing sec­tor. For the econ­omy, the bank­ing sec­tor rep­re­sents its heart. If the heart is clogged, the econ­omy can’t re­turn to vi­tal­ity.

Though the re­form pro­pos­als un­der­ly­ing In­drad­hanush for the pub­lic sec­tor banks (PSBs) were an­nounced in Au­gust 2015, few tan­gi­ble steps have been taken since then. This Bud­get did noth­ing to al­le­vi­ate con­cerns that grand an­nounce­ments are not be­ing fol­lowed up with am­ple ac­tion. The In­drad­hanush set of re­forms was based on the P J Nayak com­mit­tee re­port, which had noted the need for re­form­ing the gover­nance in boards of PSBs. This need re­mains as boards of most PSBs lack the re­quired sense of pur­pose in be­ing able to pro­vide over­sight to steer the banks through their present dif­fi­cul­ties. Board gover­nance re­mains weak even though non-performing as­sets (NSAs) are ris­ing alarm­ingly. To fix these sys­temic prob­lems, the frame­work for gov­ern­ing PSBs must cre­ate an arm’s-length dis­tance be­tween the gov­ern­ment and the bu­reau­cracy, on the one hand, and the gov­ern­ment and the PSBs on the other.

The com­mit­tee also pro­posed that the gov­ern­ment dis­tance it­self from sev­eral bank gover­nance func­tions by set­ting up a Bank In­vest­ment Com­pany (BIC) to trans­fers GoI’s hold­ings in banks. The gov­ern­ment’s pow­ers in re­la­tion to the gover­nance of banks should be trans­ferred to the BIC. Un­til the BIC be­comes op­er­a­tional, the Bank Boards Bureau (BBB) would ad­vise on all board ap­point­ments, in­clud­ing those of chair­men and ex­ec­u­tive di­rec­tors.

Against this back­drop, the Bud­get missed the op­por­tu­nity to clean up the bank­ing sec­tor. First, there was no men­tion of a ‘bad bank’, as was ad­vo­cated by the Eco­nomic Sur­vey. The at­tempt to bring more cap­i­tal into as­set re­con­struc­tion com­pa­nies (ARCs) by al­low­ing more for­eign do­mes­tic in­vest­ment has not worked, and is un­likely to work. PSBs are un­will­ing to sell their NPAs at the dis­counts man­dated, given the qual­ity of such as­sets.

This is be­cause the cur­rent gover­nance frame­work pro­vides lit­tle in­cen­tives to PSB chair­men to take the bull by its horns and sell such as­sets. In­stead, the cur­rent gover­nance frame­work pro­vides all the per­verse in­cen­tives to kick the can down the road to the next chair­man. Such pro­cras­ti­na­tion, built into the gover­nance frame­work, only ex­ac­er­bates the prob­lems in PSBs.

Sec­ond, the set­ting up of the BIC re­quires leg­isla­tive re­form, in­clud­ing the mod­i­fi­ca­tions of the Bank Na­tion­al­i­sa­tion Act and the Bank­ing Reg­u­la­tion Act. So, Jait­ley not even men­tion­ing the BIC in his speech re­veals that the gover­nance re­forms rec­om­mended by the Nayak com­mit­tee don’t seem to be on the gov­ern­ment’s agenda. So, real re­form of the PSBs is un­likely to hap­pen un­der the cur­rent dis­pen­sa­tion.

Third, lit­tle is known about what the BBB has done since it was set up. The process of re­cruit­mentof PSBchair­me­nand­board­mem­bers con­tin­ues to mud­dle through as be­fore. This process of ini­ti­at­ing the clean­ing up of gover­nance of PSBs is a full-time job that can ill af­ford the dis­trac­tions of bat­ting as a night watch­man.

Fi­nally, his­tor­i­cally, a large in­flux of de­posits into the PSBs has led to an­other round of in­dis­crim­i­nate lend­ing and even­tual NPAs and stress in the bank­ing sys­tem. Un­less gover­nance re­forms in PSBs are car­ried out, this cy­cle may re­peat it­self be­cause of the large in­flow of funds into PSBs through de­mon­eti­sa­tion.

The gov­ern­ment must attend to the ills af­flict­ing the bank­ing sec­tor. This would pro­vide much-needed fil­lip to the many laud­able ini­tia­tives on other fronts, whether it be the ‘Make in In­dia’, ‘Skill In­dia’ or ‘Startup In­dia’ cam­paigns.

PSBs are un­will­ing to sell their NPAs at the dis­counts man­dated, given as­set qual­ity

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