Managerial pay disparity between private sector and public sector banking in India is widening. Should the regulators address this by hiking public sector pay scales, or by curbing private sector pay? Drawing from international policy responses, the best way for India appears to be to curb variable pay components of managerial salaries as in the European Union.
The New Development Bank promoted by the BRICS grouping is an idea whose time has come. It will be small in relation to the Bretton Woods institutions but it can still reduce developing country dependence on the existing institutions and turn out to be an alternative source of development finance to both the members of BRICS and other developing countries. Its success, however, will depend on the quality of oversight and governance at the new bank.
The P J Nayak Committee on the governance of bank boards has proposed that the Bank Nationalisation Act and related legislation be repealed. It wants government shareholding in public sector banks to be transferred to a Bank Investment Committee that will be manned by professional bankers. The report assumes incorrectly that ownership determines board performance and that the quality of bank boards, in turn, determines bank performance. The key issues at the public sector banks, in fact, are those related to management.
The Reserve Bank of India, Volume 4 (Parts A and B), 1981-1997 (Reserve Bank of India, Mumbai; Academic Foundation, New Delhi), 2013; pp 1348, Rs 2,195.
Despite decades of effort, India’s record in the area of financial inclusion remains unsatisfactory. Nearly 60% of India’s population does not have a bank account; 90% of small businesses have no link with the formal financial sector.
Following the crisis of 2007, there is renewed focus the world over on banking structure. This encompasses a number of related matters: the size, scope and number of banks, consolidation and concentration, and the degree of competition.
Most companies would think twice before operating at a debt to equity ratio (or leverage) of 2:1. Some capital-intensive businesses, such as shipping, opt for a ratio that is considered outlandish say, 5:1. But banks really take the cake. A leverage of 25:1 is not uncommon in banking.
The financial crisis that erupted in 2007 and is still unfolding prompted a search for reforms that would make the global financial system safer. Several initiatives have emerged.
The Vickers Commission in the United Kingdom has advocated ring-fencing of core banking activities; the Volcker Rule in the United States prohibits banks from engaging in certain kinds of investment activities. Neither will be easy to implement and neither is likely to be very effective. To deal with the risks posed by systemically important financial institutions what is needed is a multi-pronged approach that addresses size, concentration and ownership structure and far more intrusive regulation than we have seen in the recent past. An important element in this approach must be the presence of a few large banks in the public sector.
The public report of the investigation by the United Kingdom's Financial Services Authority into the failure and subsequent bailout of the Royal Bank of Scotland in 2008 highlights deficiencies in regulation and supervision as also failures in bank governance. The fsa report is essential reading for regulators as well as those at the helm of banking.
The Reserve Bank of India has published its draft guidelines for new entrants to the banking sector. It would have been advisable for the RBI to spell out the principal objective in licensing new banks. Is the principal objective greater competition or is it financial inclusion? If it is competition, then it would be alright to subject the new banks to the same branch licensing norms as the existing ones; if it is inclusion then they must be told to focus to a greater extent on unbanked centres. Unfortunately, the RBI has not thought it necessary to make the case for new entrants.
Ravi Matthai and IIMA: A Response T T Ram Mohan I am grateful to Shreekant Sambrani for the detailed treatment he has given my book on Ravi J Matthai (RJM) and for a highly readable review (
