The two-day ‘Gyan Sangam’ (knowledge confluence) of PSU bank executives and the government held last weekend concluded on predictable lines. At the retreat, meant to chalk out the reforms roadmap for India’s stressed government-owned banking sector, PSU bank executives reiterated their plea for greater autonomy in functioning, while the government, led by Finance Minister Arun Jaitley, reiterated its intention of giving State-owned banks “sufficient amount of leeway” so that they could deal with “commercial issues with a commercial mindset”. As statements of intent go, this is welcome. But the reason that the same need — for greater freedom to function — has been repeatedly raised by State-owned banks reflects the gap between pronouncements and practice. At the core of this reluctance to let go on the part of the government is the duality with which it views these banks — as both commercial entities and, to quote Minister of State for Finance Jayant Sinha, as “instruments of nation building”. The ‘nation building’ role has been interpreted very widely over the years, to control everything from what banks charge for various services to ‘directed’ lending to sectors to being used as the principal tool to drive the government’s agenda of inclusive development.

Not all the problems of PSU banks have been caused by political interference alone; much of it is due to poor bank management, which sorely needs to be professionalised. In this context, the Centre’s move to split the role of Chairman and Managing Director in public sector banks — a recommendation made by the Reserve Bank of India about a decade ago and reiterated by the PJ Nayak Committee on bank governance — is welcome and is in keeping with international best practices. While the private banks had implemented the ‘split’ by 2007, such a clear separation of roles and delineation of responsibilities are needed to strengthen the focus of PSU bank managements. The present arrangement where both these roles are combined in one person has often led to excessive centralisation of powers, with its attendant ills, and often worked to the detriment of the banks. The question of accountability to the board — a principle all corporates are ostensibly governed by — is often observed more in breach, when these roles are combined. With a ‘split’ in force, managing directors can focus on critical areas while the chairmen can be gatekeepers and guide the board in the discharge of its responsibilities.

But ensuring greater accountability on the part of bank chiefs is one thing and providing them with the necessary freedom to function is another. The overall thrust of the recommendations in the PJ Nayak Committee report was directed at achieving one principal end — reduce government control of public sector banks in order to improve governance. A slew of issues that plague the PSB space need to be addressed to achieve this, ranging from the absence of an independent selection process for top bank officials to the presence of intermediaries who influence even basic functions such as loan sanctions.

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