PMO mulls new body to oversee governance of state-run lenders, move could dissolve Banks Board Bureau

New Delhi: The Prime Minister’s Office (PMO) is examining a proposal to replace the Banks Board Bureau (BBB) with a new body that would operate as a holding company to usher in reforms in public sector banks (PSBs). The latest move comes close on the heels of the massive Punjab National Bank (PNB) scam and subsequent clamour within the establishment for sweeping reforms in the banking sector. According to top sources in the PMO, the Economic Advisory Council (EAC) has suggested that the BBB could be upgraded as a holding company for appointment of top bank officers in consultation with the Reserve Bank of India (RBI). The EAC has suggested that the new body should directly report to the PMO, and not to the Finance Ministry.

“The EAC has suggested that Department of Financial Services in the Finance Ministry that looks after the functioning of banks, financial institutions and insurance companies to be kept at arms length in the functioning of new body. This clearly means there would no interference by the Department of Financial Services (DFS) in the appointment of directors and other top officials,” sources told Firstpost.

It is learnt that the EAC proposal titled ‘Continuing Reforms In PSBs for Better Performance’ is under active consideration of the PMO and a decision to upgrade the BBB is likely to be announced soon. “ While setting up a new body as a holding company, the government would require to make an amendment in the ‘Bank Allocation Act, 1980. There are certain other suggestions that are being examined by the PMO,” sources further added. A senior official in the government said the BBB that started functioning in April 2016 with primary objective of recommending names for top position in the government owned banks, was not able to act as a catalyst for reform simply because of the overstepping of Department of Financial Services in important matters and the autonomous body was not taken on board on several occasions in the past. “Department of Financial Services had clipped the wings of BBB since the very beginning. The Department had shot down several powers, which BBB wanted to exercise in the top rank appointments in the bank,” the government official said. [caption id=“attachment_4083185” align=“alignleft” width=“380”]  File image of Prime Minister Narendra Modi. PTI[/caption] Another top officer in the Finance Ministry requesting anonymity told the Firstpost that Department of Financial Services (DFS) role in top appointments in PSBs is that of a post office and he has not witnessed any interference from the Ministry in any recent case. “The decisions are largely taken by the political executive. We just shortlist the names and secretary is part of the panel comprising of RBI governor, deputy governor, expert and a former Bank’s chairman. But even then the recommendations have to be cleared at the top level and Department role is limited to the scrutiny. But, if the government feels that a new body can do the job better, it should be given a chance. However, it cannot be expected that the political executive would accept 100 percent recommendations of the new body. It may not be possible and feasible,” the officer said. The birth of the BBB was triggered by P J Nayak Committee report in 2014 which had suggested that government must distance itself from several bank governance functions, which it discharges while observing that selection process for bank directors is compromised making the board governance weak. “Governance difficulties in PSBs arises from several externally imposed constraints. These include dual regulation by the Finance Ministry in addition to RBI, board constitution, wherein it is difficult to categorise any director as independent, significant and widening compensation differences with private sector banks, leading to the erosion of specialist skills,” the Nayak panel had observed. The government needs to move rapidly towards establishing fully empowered boards in public sector banks, solely entrusted with governance and oversight of the management of the banks. Subsequently, Finance Minister Arun Jaitley in his 2015 Budget speech had announced the formation of the BBB. “In order to improve the governance of public sector banks, the government intends to set up an autonomous Banks Board Bureau. The Bureau will search and select the heads of public sector banks and help them in developing differentiated strategies and capital raising plans through innovative financial methods and instruments. This would be an interim step towards establishing a holding and investment company for banks.” Later, on August 2015, government issued a statement saying the “Bureau will be a body of eminent professionals and officials, which will replace the appointments Board for appointment of whole-time directors as well as non-executive chairman of PSBs. They will also constantly engage with the board of directors of all the PSBs to formulate appropriate strategies for their growth and development.” Turf war over mandate At the time of the inaugural of the BBB, it was general opinion that board should be provided more powers in case of top appointments at the banks. During the meeting on 8 April 2016 that was attended by then MoS Finance Jayant Sinha and then RBI governor Raghuram Rajan, it was felt that to ensure effective corporate governance of PSBs boards, the BBB mandate should be expanded. Accordingly, a revised ‘Terms of Reference’ was submitted to the Finance Ministry for approval. The DFS, however, in November 2016, turned down at least 4 mandates sought by the BBB that included directly sending the recommendations to Appointments Committee of the Cabinet, search and selection of non-official directors on PSB boards and a specific mandate on stressed asset resolution strategies. Broadly, 13 mandates were approved for the BBB to operate including to recommend the selection and appointment of whole-time directors, to develop an appropriate methodology to enable the search and selection of high calibre whole-time directors of PSBs, to recommend the selection and appointment of the non-executive chairman and to help banks to develop a robust leadership succession plan for critical positions that would arise in future through appropriate processes including performance and management systems. An officer who earlier handled the department on the condition of anonymity said the new body’s proposed mandate for directly reporting to the PMO is a right step in the right direction. “Rules of business can be amended to facilitate this but the new body must have more experts on the panel to identify and pick up the talents as well devise the mechanism to reboot and re-energize the PSBs. The government is empowered to take a call and must amend the rules,” he said. The BBB’s then Chairman Vinod Rai, in a letter to the Finance Minister Arun Jaitley in July 2017, had stressed upon organic linkages between the Bureau and the government. Rai’s letter had observed: “If the Government does indeed desire to make the Bureau address issues of governance around PSBs in a holistic manner and make its output effective, there is need for an organic relationship between Government and the Bureau. The Bureau, as a body of experts on public sector banking, would be able to provide greater utility to the Finance Minister on matters relating to the governance and performance of PSBs, if there were to be greater organic linkage and dialogue with the Finance ministry. At present the body is merely functioning as an appointment board.” Rai had made it clear that India now deserves a public sector banking system which can offer a long term sustainable growth rate rather than a public sector which amplifies the excesses of the credit boom with extreme risk aversion during credit bust and the attendant reliance on the tax payer’s funds.