Articles by T T Ram Mohan

Those who urge the wholesale privatisation of public sector banks do not seem to have given adequate thought to the mechanics of bank privatisation in India. Given the present regulatory regime for private bank ownership in India, there are formidable obstacles to privatising even what is regarded as an obvious candidate for privatisation—the IDBI Bank. The challenges in privatising several PSBs must not be understated.

Contrary to several gloomy forecasts, the Indian banking sector has been surprisingly resilient in the face of the pandemic. This is because corporates, which account more than half the loans, are in better shape and banks are well-capitalised. This bodes well for loan growth and bank performance post the pandemic.

The Reserve Bank of India’s discussion paper on “Governance in Commercial Banks in India” is refreshing in that it takes an approach to governance that is ownership-neutral. This shows a recognition that there are governance issues at private banks, not just at public sector banks. The significant proposal is distancing of four key functions at banks from the chief executive officer. The RBI may benefit from incorporating radical proposals made in other places such as the United Kingdom.

The Reserve Bank of India’s guidelines on compensation for top management of banks are more generous in respect of variable pay than those of the European Union. However, they are a step forward in that they address an important lacuna in the existing guidelines: the non-inclusion of stock options in variable pay. The guidelines should serve to set a cap on the total compensation payable to bankers. As important are the disclosures in respect of top management compensation that the guidelines mandate.

The infrastructure Leasing and Financial Services Limited, a systemically important non-banking financial company, has defaulted on its debt repayments. This has created turmoil in the NBFC sector and in the financial markets. Many analysts allege serious malpractices and fraud at IL&FS. Whatever the truth of these allegations, the fundamental problem at IL&FS was that of illiquidity arising from the use of short-term funds to finance infrastructure. The failure to address illiquidity early enough has pushed the company towards bankruptcy.