Bankers' meet: PM statement on autonomy clear signal of coming reforms

The speech by the prime minister at the Gyan Sangam, the 2-day bankers’ meet that concluded in Pune on Saturday, clearly indicate things are changing for the better.

The prime minister himself assuring that there will be no political interference and no phone calls from the PMO is in itself one big reform.

In any country one would take this for granted, that commercial banks will take decisions based on commercial interests. But in our country, like the need for cleanliness, even this needs to be reiterated as a policy by the prime minister. The nation should be grateful to Modi for stating this upfront.

Another key takeaway from his speech is that the government is seriously pursuing direct benefit transfer. This will plug a lot of leakages that happen while distributing the government’s subsidy. Also it will lend meaning and business to the new Jan Dhan accounts. Another very good macro step.

The prime minister wants Indian banks to rank among the best and biggest in the world is less concrete as a reform indicator. Does it mean more consolidation? More competitive hiring? More autonomy? We don’t know yet. But it is a welcome statement.

Besides these, the PM’s speech didn’t say much.

Reports attributing to the finance ministry say the government has agreed to the PJ Nayak report. It says the government holdings will be transferred to a Bank Investment Committee. That a banking bureau of well known bankers and experts will be formed to appoint board members for banks. The reports also say that lateral hiring at market rates will be permitted and that control of vigilance commissions will be lessened.

I am not sure how much of this is a commitment. The Nayak report itself recommends bringing banks under The Companies Act and scrapping Bank Regulation Acts and the SBI Act. Nothing has been said on this at the meeting.

Also Nayak wants the government stake in banks to go below 51%. Together with brining banks under the Companies Act, this will willy nilly mean more independent boards. Also vigilance commissions do not apply to companies with minority government stake. But this again doesn’t seem to be on the table now. The government intends to stick with 51% stake.

It is possible for the prime minister to ensure quality board members are selected in spite of the government having 51 percent stake. He is believed to have done that in the Gujarat PSUs. I would still prefer that the government’s stake be brought down and banks be brought under the Companies Act because that will institutionalise the independence of bank boards.

Be that as it may. Even if the limited point of staving of political interference is ensured and quality experts are selected to bank boards and the boards are allowed to select CEOs and question the management. These will still be major reforms.

I, for one, will be bullish on PSU banks. If Modi can ensure the legal changes, then one can be bullish for even longer.

Just one final point on selection of boards and CEOs. I do hope this entire process keeps the RBI out of the picture on selection of bank CEOs and boards. It is an unhealthy conflict of interest for the RBI to be involved in the selection of the bankers whom they will later regulate.

Every time the RBI fines a PSU bank or a PSU banker is found corrupt, the finger points to the RBI. What were you doing in the selection committee when these corrupt guys were being selected? It’s an untenable position. The RBI must get out of appointing or even selecting PSU bankers. The RBI must stick to regulating banks.