Public sector banks that continue to occupy a pivotal position in the Indian financial sector have reasons to be upset over recent circulars of the Union Finance Ministry which, they say, are an attack on their autonomy. The banks’ specific allegation is that over the past year, the government has been trying to “micro-manage” them by issuing as many as 36 directives setting new rules as well as reiterating existing ones. All of these, it is claimed, impinge on their freedom to take independent decisions even in areas that are considered very basic. The reform of the financial sector in the 1990s hinged on a fundamental compact: new private players were to be let in but an effort would also be made to ensure that the PSBs were equipped to take on the resultant competition. One of the important measures in that regard was the conferment of autonomy on public sector banks so that they could take commercial decisions independent of the government, which remains their largest shareholder. The extent of such autonomy has varied from bank to bank but in all cases it was hoped that the government would respect their autonomous status. The advent of new shareholders has further strengthened the case for autonomy.
The arrangement between banks and the government is tilted towards the latter. It calls for very seasoned bureaucrats to draw a line between exercising rights that arise out of majority ownership and those that are regulatory in nature. Obviously it would be desirable if the government sticks to policy making and allows banks the freedom to take decisions in an increasingly competitive environment. Reserve Bank governor D. Subbarao and his predecessor, Y.V. Reddy, have come out on the side of the banks. Micro-management is bad for banks and, in the long run, hurts the interests of the major shareholder, the government too. Of course, minority shareholders suffer the most and in these days of shareholder activism the government should not risk antagonising them. As Dr. Reddy has argued, the government should demonstrate exemplary corporate governance by exercising its ownership rights through its nominees on the boards of banks. The developments in the banking sector have a bearing on the government’s dealings with top-notch public sector enterprises. In their case, autonomy has been sanctified by signing MOUs, the conferment of navratna/maharatna status and so on, which basically expand the administrative and financial powers delegated to them. So, not just banks but a much larger constituency would be interested to know how the new Finance Minister intends to find a way out of this entirely avoidable area of friction.
It is not only autonomy of the banks that are are infringed. Other institutions such as the CBI etc are also not allowed to function independantly. Even the CAG is not spared. At least one Cabinet Minister has questioned the authority of the CAG to inquire into matters pertaining to the 2G auction. In UPA1, we saw the spectacle of then Union Minister of Health and Family Welfare engaged in a battle with the then Director of AIIMS.
Since liberalisation, the government has approved significant banking
reforms. While some of these relate to nationalised banks, like
encouraging mergers, reducing government interference and increasing
profitability and competitiveness, other reforms have opened up the
banking and insurance sectors to private and foreign players.Because
of all these positive actions our economy stands better in the world.
But the increasing powers of babus in the government trying to shackle
the banking system.These restrictions at micro level may be fatal for
the economy of india.So the Government of India need to built trust in
RBI, rather than interference.
It would be useful if the finance minsiter were to make a statement in
the Parliament. Or would the opposition members of parliament raise this
issue for a proper debate.
It is not clear the extent to which the government is imposing restrictions. Have the
banks all the autonomy and every major decision the banks take needs govt approval.
If this is the case then the decision making process gets slowed down and it is not what
is wanted. This is analogous to taking the country backwards and is not a good move.
But on the other hand if the govt only reviews big decisions then it may be ok.
The PSBs are made of tax payers money so the representatives of people
have a right in how these banks works.But the solution to this problem
involves realization that nationalising the banks was a mistake and
auction of the shares that the tax payers own in these banks.We need
more competition in the banking sector and the existence of PSBs will
not help it.But not only we need more competition in the banking sector
we need competition in the currency as well.The RBI did a ridiculous job
of preserving the purchasing power of the rupee.The people who work
thirty years and retire get their savings wiped out because the rupee
has been loosing its purchasing power consistently during last 60 years
or more.The indian rupee must not be forced upon the people of india
especially since rupee is structurally weak currencyand it is backed by
fiat currencies in europe as well as the american dollar.We should
encourage gold as our alternative currency just like it has been for
6000 years.
We have found time and again that top bureaucrats in the Finance Ministry are simply not ready to forego their powers and have thus tried to put more and more hurdles in the autonomous functioning of public sector banks. It is time the bank chiefs and the Boards are given more powers and are also held accountable for performance.
“Occasionally, there are concerns over the government exercising its ownership rights not through the established channel which is board mechanism, but outside board (of directors),” so said, according to reports, the Governor of the Reserve Bank of India. He seems to have added that “I don’t think it is a good example of corporate governance”. Strong words those, coming from the Governor, who is generally given to understatement and not critical of government in public. Well deserved too, looking at the large number of circulars — threatening to be an avalanche — emanating from the Department of Financial Services on issues of day-to-day management of banks. By micro-managing public sector banks (PSBs), without being fully equipped to do so, the Government officials could end up harming them, through inappropriate advices as discussed in brief in this article.
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