Reimagining the future of PSBs: India\'s brightest minds on catalysing PSU banks

The public sector banks are at the crossroads. While the entire banking sector was stressed by the economic downturn till 2015 and court orders on coal and spectrum, NPAs of private banks are at 4.5 percent of their total loans while that of PSU banks are at 14 percent. The worst private bank NPA ratio is 7.8 percent; the worst PSU bank NPA ratio is 25 percent.

The latest Nirav Modi fraud has also hit PSU banks much more than private banks. So is it a time to reimagine the ownership and management of PSU banks?

In an special series, PSB 2.0 on CNBC-TV18, Bimal Jalan, Former Governor of RBI, and Sanjeev Sanyal, Principal Economic Advisor spoke on whether we need to redesign public sector banks and if yes, how.

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Below is the verbatim transcript of the discussion.

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Q: Where is the problem, is it poor regulation by auditors and the regulator, is it indifference and lack of motivation in the management of public sector banks, what has gone wrong?

Jalan: Public sector banks are part of government. So, there may be many problems in terms of execution, in the sense that the whole administrative structure in our country is multi-layered and so if you want to do something it requires a lot of permission and lots of movement of the files from one ministry to another ministry to somewhere else.

So, the main issue is in terms of public sector banks being as part of government. Just as in terms of education or in terms of health or in terms of insurance, you want these services to be delivered. Not that public sector banks are not necessary, they are in my view an important instrument to outreach the people. You have private banks, they are very good and we are very proud of them but if you look at the outreach of the private sector banks, they would be much more limited than the outreach of the public sector banks. When we are talking about public sector, take it in a larger context that we are talking about delivery of banking services to the people.

To come back to your main question that what is it that we can do to improve the functioning of the public sector banks, the main issue that we have to grapple with is that public sector banks which are spread all over - decentralisation. I am in favour of decentralisation of the process. Government should decide on policy. Priority sector lending or what the interest rate should be and so on and so forth, that the Reserve Bank of India (RBI) decides, the two combination - the RBI and the government - they would decide what should be the policy, what should be the interest rate, what should be the outreach and so on and so forth. However the governance part, that is how a public sector bank should be run, that must be delegated and decentralised to an autonomous agency.

We have Bank Board Bureau and so on and so forth but I would say that what we need to do is you think of public institutions like UPSC. If you look at UPSC, if you look at the election commission, they are public institutions and they deliver. The largest free and fair elections in human history is delivered by election commission. If you look at all our IAS, administrative system, it is through the UPSC. You ask yourself the question that why is it that we have institutions of this type, we have institutions of CAG type and they function very well because they don't have to report to the ministry. However what they do, they are accountable to the parliament.

So, supposing if you took a look at the public sector banks and you have a banking bureau, you don't need the department of banking per se.

Q: Do we need 70 percent of the banking sector to be dominated by these kind of banks, that is majority government owned banks? Should we look for a legislative change where by the government owns a smaller number of banks and some of them the government allows its stake to fall below 50 percent, so that administrative controls are reduced?

Jalan: I think you have to first concentrate on the functioning of different public sector banks. I am supposing we have setup public sector banks in an area where the amount of business is very small, where the organisation is very difficult to have with top class bankers and so on and so forth, then the best thing to do is to close that bank for example. If something is not functioning, if something is not delivering what you have set it up to do, then close it and give the job to some other bank.

Q: So, you would go to the extent of closing down some of the public sector banks will not be a bad idea?  

Jalan: If they are non-functional, if they are making large losses, if the fiscal cost that you are incurring is much larger than the benefit that you are getting from having that particular bank, then you can close it.

Q: I spoke to Montek Singh Ahluwalia on the same topic and he was suggesting that government can have a big voice in the strategy of a bank even if it held for instance 30 percent, is that something that you would recommend?

Jalan: I don't recommend but when you are talking about Montek Ahluwalia, he is a very thoughtful person and there can be different views. What I am trying to emphasize is that the main part that we have to try and tackle is relationship between what you might call ministries of the government and banks of the government.

Q: You don't want the department of banking services, you would rather have something like the UPSC?

Jalan: If you have the department of banking services, the department of banking services would be monitoring the progress of how the government money is being spent. The example of UPSC etc that I gave was that it is not the public sector part of the problem, it is what we are doing with a particular institution and making it function much better than what we are at the moment able to achieve.

Q: What according to you is ailing the current system especially that big fraud of USD 2 billion that is dominating headlines, would you say that this is just a localised failure of checks and audits or would you say that it has been a more larger failure, that the RBI failed in its regulation, that auditors failed, is it a larger systemic problem?

Jalan: This issue has been discussed and it is very distressing what has happened. We have to see exactly why it happened, how do you allow this kind of functioning of a bank over a period of 3-4 years. If there was some abrupt thing then you can say this happened and this was abrupt and we have handled it. However if this particular problem has been prevailing in a public sector bank for a long time then that should be tackled. If the officials and so on have been doing something then the board is responsible or the scrutiny audit etc there should be something which would reveal what is happening. It has nothing to do with public and non-public, it is the governance part as to why did this happen.

Q: Whether it is the UPA or the NDA combinations, political parties have not encouraged, have not even entertained the idea of bringing governments stake below 51 percent in any of the banks. Do you think that this is going to be politically unsaleable?  

Jalan: I don't think it is politically unsaleable as long as these are government banks. If you decide supposing to lower the amount of holding, you can do it because it saves the shareholding of government and it has the money but it doesn't resolve the kind of issues that we have been discussing.

Q: If we have to reduce the stake below 49 percent, first of all it cannot be governed by the Banking Companies Act. As Dr PJ Nayak had said we should probably move it to the Companies Act. If one does that then boards can be more independently appointed, they will reflect shareholding, there can be independent board members. Right now under Banking Companies Act, they are government officials who are board members. So, bringing down below 49 percent accompanied by banks moving to the Companies Act can mean complete reconstitution of the board, can mean competitive recruitment, can't it be more than just cosmetic change?

Jalan: These are not inter-related. Supposing you have reduced it to 49 percent but it is upto the government to decide exactly what the governance system would be, it is still the majority holder.

Q: You would still say that a legislative change is needed or would you not?

Jalan: That can also be done, that is not a problem. You introduced Bankruptcy and Insolvency Act for example, that could have been done two years ago or three years ago or today. Today we have the great advantage of having a government in power with a majority. It is not like 1989 to 2014 when we had 9 separate governments with very short tenure and 20 parties getting together and forming a government. Today you have the opportunity to make fundamental reforms and I hope that will happen.

More to come...

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