Bankers Retreat: a

good beginning
C. R. L. Narasimhan

two-day Gyan Sangam or Bankers

Retreat was arranged by the
Finance Ministry in Pune
recently. Apart from top
executives from public sector banks (PSBs),
insurance companies and nancial
institutions, senior Finance Ministry
officials attended the meeting. Finance
Minister Arun Jaitley, Minster of State
Jayant Sinha and Reserve Bank of India
Governor Raghuram Rajan participated in
the meeting, whose high-point was the
address by the Prime Minister, in which he
categorically promised bankers that there
would be no government interference in
the functioning of banks. The government
has quickly backed the PMs assurance by
sending out letters to banks on those lines.

The interaction of ministry officials, RBI

Governor and heads of PSBs in an informal
setting is a novel idea that is to be
welcomed. As a management tool, a
meeting away from the pressures of day-today work is meant to unfreeze the
established behaviour patterns and enable
the divergent shareholders the
government, owner, regulators and the
banks themselves to open a healthy
dialogue. Reports on the meet are scarce,
but whatever information that is available
suggests a healthy awareness on the part of
bankers and government officials alike of
the burning problems, which banks and
policymakers alike face.
These can be summed up in three words
recapitalisation, consolidation and
professionalisation of banks boards and
their management. The government, as the
majority stakeholder, has an overarching
role in the functioning of PSBs, which,
despite the entry of many new generation
private banks since the 1990s, continue to
have the largest share of commercial
banking business in the country.
The crux of the problem and this, in
fact, ought to have been the underlying
theme at the retreat is for the
government to draw a ne line between
exercising the rights of majority
shareholders for the common good and
interfering in the business of banks, which
is mutually ruinous. The question then
arises as to whether it is possible at all for
the government to stop interfering while
remaining a majority shareholder.

Benets of govt. ownership

In the broadest sense, a majority
government ownership by itself is not such
a bad thing. On the contrary, it confers a
number of benets to the banks. A
government stake, even a minority one,
lends heft to a bank whose balance sheet
has been weakened by circumstances. A
majority stake can be a saviour. This has
been amply proved in India in the 1990s,
Indian Bank, whose balance sheet was
devastated through some reckless lending,
retained its depositors condence mainly

because it was owned by the government.

The Unit Trust of Indias agship scheme,
US 64, could be wound down without facing
a run because of government ownership. To
big banks and institutions in the West, the
State has acted as saviours during the more
recent nancial crisis, lending money and
more importantly assuring all stakeholders
of unlimited support. Not surprisingly,
some of them continue to be technically
government-owned till today.
The key issue before the PSBs is,
therefore, to draw on the strengths of
existing government stake, while
simultaneously striving moving towards a
more commercial orientation. Several
approaches have been contemplated over
the years. Outright privatisation is simply
ruled out, although several trade unions,
among others, see in the current reform
initiatives a sinister move
towards backdoor induction of
private sector. Yet, banks
require a humongous amount
of money to stay capitalised
some Rs.2.4 lakh crore and
meet the international
regulatory norms conforming
to Basel III requirements. The government,
which has been making budgetary
allocations, will not be in a position to do
so. So, the challenge is to nd nongovernment sources, which again means
demonstrating a more commercial
orientation. Consolidation in the banking
industry may happen but over a long
period. At the recent retreat, this idea has
not found many takers among PSBs.
Individual banks, therefore, have to spruce
up their governance to stay in the race.

Governance, the key

It is in such a context that the report of
the P. J. Nayak Committee on governance
in banks was discussed. The report has a
number of useful suggestions relating to the
composition of bank boards, appointment
of chief executives and their tenure. PSBs
are subject to dual regulation from the
Ministry and the RBI. By far the most
discussed proposal is to have a separate
holding company (Bank Investment
Company or BIC) in which the
governments shares in these banks will be
vested. The holding company will monitor
the performance of PSBs, make suggestions
to improve governance and act as a buffer
between them and the government and
help in raising additional capital. At the
Pune retreat, PSB heads had reportedly
agreed to prepare an action plan to
implement some of the key proposals of the
Nayak panel. The objective is to confer
greater autonomy for the PSBs to enable
them to function on commercial lines.
Despite the good intentions, it is unlikely
that some or all these recommendations
will be implemented soon. Successive
governments, including nance ministers,
have been aware of the malaise that afflicts
the public sector and have, in fact, strongly
argued for removing the constraints, for
instance, decision making by banks. Yet, no
appreciable change has taken place over the
years. It is naive to think that the Gyan
Sangam will spur change anymore than
what nance ministers, past and present,
have been able to do. Nevertheless, it ought
to be viewed as a good beginning.