Financial Services Institutions Bureau (FSIB) came into being on July 1 replacing the Banks Board Bureau (BBB) that had functioned from April 1, 2016.

The scope of FSIB is now expanded to provide members of Board of Directors – Executive and Non-Executive Directors – covering all state-owned financial institutions including insurance sector.

It will recommend persons for appointment as whole-time directors and non-executive chairpersons on the Boards of financial services institutions and for advising on matters relating to personnel management in these institutions.

Its mission is to develop excellence in corporate governance practices in public sector financial institutions (PSFIs).

Since the number of public sector banks came down to 12 after a spate of mergers in 2019 and 2020, the asset size of these banks had grown and the shock of pandemic and its aftermath led to multiple challenges exacerbating the risks for PSFIs.

The exacerbated risks in financial intermediation when seen together with the external and geopolitical risks poses a great challenge to the newly formed FSIB.

The crux of challenge

The ability to build resilience, apprehending the future risks and ring-fencing organisations against them requires not only maturity, experience, knowledge and alacrity but also an enterprising spirit.

In an increasingly, digitally connected economy, the efficiency of formal financial sector in reaching out to entrepreneurs with well calibrated risk adjusted financial products will play a key role in the speedy economic revival and growth.

Therefore, FSIB is required to measure the competence of people to lead PSFIs not only for today but also ensure that those identified can cope with the risks of volatility, uncertainty, complexity and ambiguity (VUCA) inherent in the business environment. The risks of VUCA will increase as the economy picks up its move towards $5 trillion and then $10 trillion economy in the coming years.

Long term task – Autonomy

In this context, the recent report of NCAER on ‘Privatisation of PSBs in India – Why, how far’ makes among others an interesting, empirically based observation that private banks have done better in the last two decades compared to PSBs, notwithstanding the limitations within which the PSBs operate.

It must be noted that statistics divulge only one part of the picture; the remaining part is to be grasped from their operating ecosystem.

When private banks came into being, they poached talent from PSBs, who were attracted by the better career and pay prospects.

Under the leadership of the private banks’ chiefs, these enterprising former PSB employees have integrated well into the work culture of private banks. These PSB employees have, in fact, played a key role in the success of private banks.

Taking a cue from this trend, FSIB while screening the competence levels of next generation leaders have to play a critical role in convincing the mandarins of financial sector about the importance of autonomy in nurturing leadership skills.

If PSB employees can perform well in private banks, they can do as well in PSFIs too, provided similar support is extended. The next point is ownership.

Long term task – Ownership

Though not within the explicit remit of FSIB, the issue of ownership of PSFIs needs deeper analysis. Post nationalisation, the yeoman services of banks in extending outreach cannot be undermined; it was needed for economic transformation.

If statistics of social banking is segregated from total banking, the role of PSFIs will look impressive.

If the stakeholders are convinced that subsidised banking services from PSBs are not needed any more, FSIB can work towards shift of ownership from government to private for focusing on autonomous commercial banking culture, which prices every bit of service either directly or indirectly with inherent cross subsidisation.

Since a developing economy needs the services of social banking vehicles, the existence of PSFIs is necessary.

A balance between the two can gradually help shift from PSFI dominance to private dominance to phase out public ownership by 2030.

The NCAER report affirms that banks operating on commercial lines can perform better and ownership has to be balanced between social and commercial needs of the economy.

Long term task – Governance

When it comes to ensuring corporate governance practices, a greater long-term collaboration with regulators, and laying down the checks and balances will be important.

The rule book may need to be rewritten for implementing in letter and spirit, corporate governance regulations that are common to all; however, these rules now work differently for different institutions.

In a highly data driven regulation set-up, it is difficult to detect irregular practices not reflected in data points.

Some international regulatory practices encourage the use of psychologists to discuss business plans that reflect the inherent risk appetite.

Thus, lot of innovative methods will have to be evolved to ensure that PSFIs adopt best practices of corporate governance, institutionalising a freewheeling conversation among board members and regulators. So FSIB should induct the right leadership to drive performance, but other ‘soft’ factors are equally important.

Occasional informal chat of key leaders and even regulators with the line management and more effective methods of implementing whistleblower policy will be required.

How the committee will work on institutionalising such reforms and providing the required autonomy and corporate governance practices will have to seen.

While its near-term role of selecting right talent for leading PSFIs is clear, long-term reforms to create the right kind of enablers will need huge support from all stakeholders.

The current design of FSIB broadens the scope of talent induction but how to empower them to really perform will have to be worked out in coordination with related stakeholders.

Fusing together the right talent, autonomy, governance and working towards balancing role of ownership is a daunting task for harnessing the full potential of the financial sector.

The writer is Adjunct Professor, Institute of Insurance and Risk Management – IIRM. Views expressed are personal