Rebooting PSBs

With public sector banks and their non-performing loans, prevention is far easier than cure. It is thus critical that the Government, apart from mulling ideas to rid PSBs of their present stockpile of bad loans, also initiates structural reforms to prevent their recurrence. The constitution of the Bank Boards Bureau (BBB) in April last year, chaired by former CAG Vinod Rai, fired up expectations that the governance overhaul would move quickly ahead. But a year on, the bureau has taken baby steps towards this objective. The fault lies mainly with the Centre which has hamstrung its efforts through a very restrictive mandate.

It is by now widely acknowledged that the bad lending decisions at PSBs can be traced mainly to governance issues — poor risk management and credit appraisal systems, dual regulation by the RBI and the finance ministry, political interference in lending and top level appointments, as well as the poor compensation and brief tenures of their boards. Of these, the BBB is empowered only to address the last aspect; it can advise the Government on the appointments of chairmen and whole-time directors. The bureau’s suggestions are also vetted, and sometimes turned down, by the finance ministry. Given this context, it is unclear if the BBB’s latest missive mooting a new Governance, Reward and Accountability Framework for PSBs will be implemented any time soon. In fact, the PJ Nayak committee on bank governance had envisaged the BBB only as an interim step in governance reforms. To ring-fence bank boards from political interference and grant them autonomy, the committee had suggested that the Government transfer its holdings in these banks to a separate Bank Investment Company, and then dilute its equity stake to 50 per cent. But so far, the Centre has been reluctant to act. Given the precarious health of many PSBs and the large deposit base they command, it seems to be wary of alarming depositors by withdrawing its perceived sovereign backing. Nor is it able to find sufficient capital given fiscal constraints to nurse the distressed banks back to health — hardly reassuring for the same depositors.

Therefore, the time is quite ripe for the Centre to let go of its stranglehold on PSBs. Here, vesting government equity in a holding company may not be enough as this entity may still be tied to its apron strings. To really professionalise PSB boards and convince their employees that they are accountable only to their consumers and shareholders, the Centre will need to do more. It can consider divesting shares in select PSBs through public offers to retain a minority stake. It can also push through legislative changes and modify reporting structures at PSBs so that they fall under the ambit of the Companies Act rather than the Bank Nationalisation Act for a level playing field with private firms. Only this will send a clear signal, both to bank boards and their employees, that the umbilical cord with the ‘parent’ ministry has been cut for good.

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