Public sector bank autonomy: Only lip service so far

Unless the government gives up control, functional autonomy at state-owned banks will remain a mirage

Much has been talked about minimal government interference in public sector banks in the past few days, especially during the two-day bankers’ retreat organised last week by the finance ministry.

Finance Minister Arun Jaitley and Prime Minister Narendra Modi's assurances of zero interference was followed up by a press release by the finance ministry saying that government banks can take commercial decisions without any fear or favour.

But one example shows how much autonomy this government is really willing to give to the banks: Bank chairpersons and executive directors were asked to travel in a luxury bus from Mumbai to Pune for the retreat, particularly those based in Mumbai. And government officials actually asked some of the bank officials if they indeed came together in a bus! 

Such lip service to bank’s’ autonomy is nothing new. The finance minister of the previous regime had also said roughly the same thing. P Chidambaram, after assuming charge for the second time as finance minister during the UPA regime, had said the UPA government would not unnecessarily interfere in the day-to-day affairs of the banks, and any advisory, if at all required, would be sent only after his approval.

Chidambaram’s statement came in the aftermath of the then financial services secretary sending letters to chief executive of public sector banks on regular basis which included directives on deposit and lending rates.

While Chidambaram maintained his promise to some extent, the ministry under him also instructed banks on different issues, pushing educational loans and lower interest rate for senior citizens, to name a few.

This government is not different. Here are two reasons why:

Jan Dhan targets: Banks have been given targets to open accounts under the Prime Minister’s Jan Dhan Yojana. The objective may be noble, but shouldn’t it be banks who should decide how far they can go, which is a function of parameters like work force, rural reach, business plan etc. The Reserve Bank of India has also asked for fostering financial inclusion in the country. But it has not set any targets. Instead, banks have been asked to give their financial inclusion plan.

Appointment of chief executive: Is the appointment of a chief executive not a commercial decision? For private sector entities, it is one of the most important business decisions, where the board decides such an appointment. The government, as the majority owner of the banks, appoints the chairman and managing directors and executive directors. The eligibility criteria are also set by the government.

As long as the government does not reduce its controlling stake the banks, autonomy will continue to be no more than sound bites. That is what bankers have recommended during the two day retreat. This was what the PJ Nayak committee – which was set up to improve governance in banks – has also recommended, along with a three phase transition process to reduce the government’s stake below 51%. 

(Manojit Saha is Banking Editor at Business Standard)