ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Hostage to Questionable Priors

The RBI's Nayak panel goes beyond its mandate to recommend a dismantling of government stakes in banks.

In some sense the recently released report of the Reserve Bank of India’s (RBI) Committee to review governance of boards of banks in India, chaired by P J Nayak, completes the third arm of the triangle of the new policy framework of the RBI under Governor Raghuram Rajan, the other two being the Urjit Patel Committee report which advocated inflation targeting and that of the Nachiket Mor Committee which addressed financial inclusion. These three reports together constitute the broad contours of a grand new “monetary-banking-financial inclusion policy” configuration of the RBI. The terms of reference of the Nayak Committee which was constituted by the RBI in January 2014 included a review of the regulatory compliance requirements of the boards of banks, the working of these boards, regulatory guidelines on bank ownership/concentration, and an examination of board compensation guidelines. The report of the committee starts with an observation that the Government of India really has two options if it wants to strengthen the banking sector: (a) privatise the public sector banks (PSBs); or (b) design a radically new governance structure for the PSBs that would ensure their ability to compete successfully. While explicitly endorsing the second option, the committee implicitly advocates privatisation through a roundabout route. It identifies the key constraints of the PSBs as (a) dual regulation (by the finance ministry, and the RBI); (b) the manner of appointment of directors to boards; (c) the short average tenures of top management; (d) relatively low levels of compensation; (e) external vigilance enforcement; and (f) applicability of the Right to Information (RTI) Act.

The committee which had one representative from a PSB (a retired official) and one from the Securities and Exchange Board of India was dominated by financial market participants and specialists. It is, therefore, no wonder that its report oozes with the sentiment of financial market fundamentalism. Surprisingly, there was no representative from the Ministry of Finance, banking trade unions and investor groups. Furthermore, it is intriguing that an RBI committee report can begin with the sentence, “The financial position of public sector banks is fragile, partly masked by regulatory forbearance.” Such a statement from a RBI-appointed committee is extremely irresponsible. Since most of the PSBs are also listed in the stock market, this statement is enough to cause a run on PSBs. Contrast this to the RBI’s Report on Trend and Progress of Banking in India, 2012-13, which as ­recently as November 2013 went on to comment, “…overall the comfortable capital base still lends resilience to the Indian banking sector.” What happened between November 2013 and May 2014 that the assessment of the Indian banking sector had to change so drastically? Or, is it an insinuation of the Nayak Committee that RBI has been camouflaging banking data so that the true nature of the Indian public sector banking system is not known transparently to the nation?

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