Therefore, what the RBI
governor says, dual oversight of public sector banks
is correct. It would of course be self-serving to suggest that this naturally means the RBI
has no responsibility to bear, and that aspect would be incorrect. However, it is important to ensure that the duality of responsibility has to be cleaned up. As the saying goes — no man can serve two masters. In the collision of multiple truths, the clash of ideology in the approach to regulation, ownership and governance, can lead to losing sight of the important, overwhelmed by the immediate.
The immediate often trumps the important, but it is really important to take a close and hard look at how to clean up poor and ineffective governance of public sector banks, and the approach of treating the board of directors as policemen instead of strategic overseers. This government has many firsts to its credit in being resourceful with law-making — promulgating presidential ordinances to bring in substantive law; and effecting serious amendments to laws by embedding them in Money Bills (obviating the need to get the amendments cleared by the Rajya Sabha). The resourcefulness needs to be brought to bear with public sector banks.
The pace with which new law on fugitives is being piloted ought to be repeated with cleaning up state ownership of public sector banks
and the attendant governance shortcomings. At the least, a simple legislation to convert each of the public-sector banks into a public limited company governed by the newly-introduced (now nearly four years old) company law should be passed, which would bring each of these institutions under the more effective, uniform and standard norms of corporate governance that are applicable to private sector banks as well. Without this measure, simply building up a Bank Boards Bureau
with an extremely ambiguous role — ranging from the non-performing assets
problem to being the search-and-selection agency for staffing bank boards — would be of no consequence.
The next step would be to dilute state ownership in these banks to a minority holding. The vigilance and investigation oversight of these banks would need to end — they have failed to contain the scale of fraud on these banks, and worse, they have ended up terrorising honest bank officials into becoming indecisive, further hurting the interests of the bank. Bank officials involved in the credit appraisal and sanctioning function are known to trip before they rise up the ranks with their career records being spoilt by vigilance and corruption cases, leading to a vacuum in the leadership and a lack of available bandwidth for senior management.
The implicit sovereign guarantee underlying every public-sector bank is borne out by each of the banks being recapitalised with sovereign money. The capital market regulator is again issuing a series of exemption orders exempting the government from having to make an open offer under the takeover regulations upon infusing more funds into these banks, whose shares are listed on stock exchanges. Resolution of weak banks and spreading the commercial pain of bank failure across its depositors is a political hot potato only because of this implicit guarantee. Therefore, sovereign funding of these banks through new capital could come the next time with strings attached — the legislative changes discussed above. Since it would involve state funding, they would in fact be Money Bills. All that is needed now is political courage.
The author is an advocate and independent counsel. Tweets @SomasekharS