Raghuram Rajan bats for more autonomy for PSBs

With competition set to get more intense in the banking sector, the only way to keep PSBs in the game is by shedding government's stake in them

srishti

Srishti Pandey | May 21, 2014



Of late public sector banks (PSBs) have been in a mess: Be it a surge in the numbers of loans going from good to bad, or the unwillingness of bankers to take bold measures for fear of getting entangled in vigilance inquiries, PSBs are going through a bad phase.

And given the intensity of competition in the banking sector is only set to increase, it may be time to reduce government interference to ensure that PSBs get the freedom to take their own decisions and bring in greater operational flexibility. Or at least this is what the RBI governor Raghuram Rajan had to say on Tuesday at the annual day lecture at competition commission of India (CCI).

Clarifying that he was not hinting at privatisation of banks, Rajan highlighted the need to change the governance and management structure at these banks to enhance their competitiveness in a sector “on the cusp of revolutionary change”: “If public sector banks become competitive, and especially if they do so by distancing themselves from the influence of the government without sacrificing their ‘public’ character, they will be able to raise money much more easily from the markets." (Read the full text of Rajan’s speech here.)

“Privatisation is not necessary to improve the competitiveness of the public sector," he further said, "but a change in governance, management, and operational and compensation flexibility are almost surely needed in India to improve the functioning of most PSBs.”

Predicting that the intensity of competition within the banking sector in India will increase manifold in coming times, the RBI governor said the stability in status quo will be demolished and access to more funds for the better performer will be ensured.

Rajan’s remarks clearly hinted at his inclination towards accepting the suggestions of the PJ Nayak committee, which had submitted a report to review governance practices in the PSBs earlier this month.

The Nayak committee has suggested, among others, to create a holding company to hold government’s shares in PSBs, increasing the length of tenures of PSB chiefs, separating the position of chairman and CEO, and appointing more independent directors on bank boards.

This could be a radical step towards improving the performance of PSBs which have been miserable given the soaring bad loans and dropping profitability. And the staff crunch problem at PSBs is not helping.

Apart from poaching of talent by private banks, PSBs are also set to lose out on a huge chunk of its middle- and top-level management, due to retire in the next three years. The government's failure to chart out manpower requirements at the earlier stages is to be blamed for this crisis. And the subsequent failure to retain their talent by providing a challenging work environment, motivating employees and compensating them adequately has only worsened the situation.

In addition, the governor pointed out the problem of constantly questioning the decisions of the bank employees by the vigilance department, which often puts them on the back foot.

“PSBs need to be able to recruit laterally, while retaining the talent they have, but to do so they need to be able to promise employees responsibility as well as the freedom of action,” Rajan said.

At present, PSBs are run by the party in power to promote their own interests, even if it means hurting the financials of banks. Reckless lending to close associates of politicians is not an unknown phenomenon and this too has contributed to the bad loan menace.

PSBs should be given a lot more autonomy to run keeping their own interests in mind and this can only be done by distancing themselves from government influence without compromising on social welfare. The Nayak committee's recommendation to dilute stake of government in the PSBs is a good starting point and this should not be put on the back burner.

Private banks operate with a stronger talent pool and are slowly but surely gobbling up the PSBs' market share. Ensuring greater operational flexibility and a stronger framework for governance at PSBs will help them bounce back into the game.

Comments

 

Other News

70 words that define India, why Doklam stand-off won’t lead to a war, and more

As India celebrates 70 years of freedom, Governance Now looks back and picks 70 words – or phrases, buzzwords, slogans, events – that best define this ancient nation and young democracy. Here, you will find much to be proud of, much tinged with pangs of nostalgia. Then there are entries that

A dose of PPP in healthcare is what the doctor recommends

Dr Kenneth E Thorpe, a professor of health policy and management at Emory University in the US and also the executive director of Partnership to Fight Chronic Diseases (PFCD), says that the government alone cannot do everything. “They don’t have the resources and capacity. So we have to fin

EESL signs MoU with oil companies for energy saving appliances

Energy Efficiency Services Limited (EESL), a joint venture company of PSUs of ministry of power, signed an agreement with oil marketing companies (OMCs) of ministry of petroleum and natural gas for distribution of energy efficient appliances under the flagship Unnat Jeevan by Affordable LEDs and applianc

Jammu airport’s upgraded terminal building inaugurated

Union minister for civil aviation, P Ashok Gajapathi Raju inaugurated the upgraded passenger terminal building of Jammu airport.   Notably, Jammu airport belongs to the Indian Air Force, and airports authority of India (AAI) maintains a civil enclave for civil aircraft operat

Election Commission shows it has spine

The election commission has become increasingly assertive in the past few months, showing its mettle in times of electoral challenges.   Weeks after rooting from EVMs and just days after the poll panel declared votes cast by two rebel Congress legislators in the Rajya Sabha e

Is Amit Shah`s blueprint for 350-plus seats in 2019 Lok Sabha elections achievable?

Is Amit Shah`s blueprint for 350-plus seats in 2019 Lok Sabha elections achievable?



Video

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter