In one of his speeches, the then president of the USA, Ronald Reagan, had said that government was not the solution to our problems; government was the problem. Though sounding quite droll, the statement becomes serious if one reads the paper put out by the ex-governor of the Reserve Bank of India, Raghuram Rajan and the ex-deputy governor, RBI, Viral Acharya, on 'Indian Banks: A Time to Reform'. Most of what they have said when talking of the public sector banks (PSBs) is quite well known and not something that would strike the reader as being extraordinary. But coming from two central bankers who saw the inside working of the system, it is quite hard-hitting, as it probably tells us in a way that there is little will to change the structures.
There are four strong points made by the authors. The first is that there is too much of interference by the government and that there is no inclination to change the dynamics. Having independent management and boards in the PSBs will just not happen and the present system of having the bank board bureau appoint the personnel is no different from the earlier practice of the department of financial services being in charge, as members of the bureau are appointed by the department. There is absence of incentive for anyone to change this process, as it serves the bureaucracy as well as the government. Here, they are agnostic to which party is in power and in fact, have patted the NDA government for trying hard to change the dynamics.
The second is that the PSBs are being used to meet social and political objectives. The government gets power from driving lending. The circle of power is easy to see and being in the RBI, the authors had a vantage position. The concerned parties that influence the Government get the system to appoint CEOs of PSBs, who then perform the job of lending to them. This circle of influence has been in operation and is responsible for the crony-lending that Rajan had spoken of, when he oversaw the Central Bank.
The government also has a lot to gain, as it has access to a lot of sensitive information and here the authors have quoted the case of how only one PSB oversaw the issuance of electoral bonds. It does get disturbing when they elucidate the part of the symbiotic relationship which is created where PSBs arrange the logistics for all fact-finding meetings in enjoyable locales. The power play is visible where bureaucrats at the joint-secretary level can order the chairpersons of banks.
The third point is related to the issue of government control for meeting social goals; they espouse the reimbursement to be given for carrying out these programmes. Here, the indication is probably to the Jan Dhan Accounts, which the PSBs had to bear the responsibility of executing at their cost. In the absence of such an equation, the PSBs will continue to incur costs of implementing political agendas of various governments and will never be able to compete successfully with the private banks.
Last, the authors also have something to say on the pay structures which are required to be linked to performance, to improve efficiency in the PSBs. Here, they point out, this is going to be very difficult because of the bureaucracy. Ministry officials will never let the salary of the bankers surpass theirs and this becomes a limiting factor. Hence, public sector bankers are less enthusiastic about lending - the 3 Cs – CVC, CBI and CAG prevent active decision-taking.
They don’t sign off on a positive note, as they highlight the fact that unions don’t want things to change, bankers are happy with the status quo and while deposit holders could take umbrage at times, the malfeasance of lesser degree in some private banks makes them disregard the bigger picture.
It is interesting to hear the new generation of governors and deputy governors, as well as ex- chief economic advisers talk freely after their terms. Former CEA Arvind Subramanian had called demonetisation draconian, while Urjit Patel has reiterated his stance on the IBC and the restructuring of loans in his book. It is evident that while in the system, most professionals have to be tight-lipped about the surroundings but find their voices once they demit office. While it is worrying, it is hoped that change comes in faster, so that the PSBs are better governed. The determination of the present government is laudable, but assuredly, changing such deep entrenched systems takes time. We may have to be more patient.
Madan Sabnavis is Chief Economist, CARE Ratings Ltd. Views are personal.