The Hindu Business Line : Reforms panel moots delinking banks from govt

Chennai, April 7 The Committee on Financial Sector Reforms headed by Dr Raghuram Rajan, Professor, University of Chicago and former IMF Chief Economist, has suggested a number of steps to reform public sector banks (PSBs).

It has proposed creating stronger boards for these banks. It notes that many Government appointees on bank boards have limited understanding of the business of banking and are on boards simply because of their eminence in other areas. It suggests the creation of an independent selection board of eminently qualified individuals from varied backgrounds to propose board members for various PSBs.

The committee also proposes that in the long term, the bank board rather than the Appointments Committee of the Cabinet must make the appointments of the Chairmen and CEO of banks. It recommends performance bonuses, greater pay for directors, of which a significant portion is stock-based, in order to attract capable individuals and give them a greater sense of responsibility.

The committee suggests that PSBs be allowed to seek out strategic partners among other financial institutions (including private and foreign ones), with partners allowed a voting stake of up to 20 per cent.

DELINK from Govt

The committee recommends delinking banks from government. Pointing out that bureaucracy and business are fundamentally incompatible, especially in a dynamic open economy, it says that it is better that management decisions be vetted by boards rather than by criminal investigators. The Central Vigilance Commission second-guesses all important bank decisions. This delays every decision and creates risk-aversion and induces an excessively bureaucratic decision process through all levels. The committee recommends that the government should legislate to remove the oversight of bodies such as CVC over PSBs.

The committee also proposes that large PSBs create financial holding companies with the bank and other financial firms as subsidiaries to realise economies of scope from providing multiple financial services. It would also allow banks to sell more shares to the public to raise capital for growth even while the government retains majority control over the holding company. The committee also suggests exploring the possibility of reducing government stake to below 50 per cent to achieve this objective.

BRANCH LICENSING

The committee recommends that branch and ATM licensing must be abolished immediately (other than those for foreign banks). While acknowledging that the rationale for licensing was to make banks go to under-banked areas, the committee recommends that the decision of how many and where to open be left to banks themselves.

The committee also recommends that consolidation among banks should be encouraged but not forced.

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