The Reserve Bank of India (RBI) governor has publicly cautioned the government against micromanaging public sector banks directly, explaining that the correct route through which the government as majority owner should work is the board, on which it has its nominees. Then, for good measure, he has added that this would be in line with good governance, in which the government could set an example! A limit of sorts was crossed recently when the government, or the department of financial services, first issued a letter to banks to limit their acceptance of certificates of deposit and bulk deposits and, on confronting a volley of protest from bank chiefs, held the instructions in abeyance.
It is useful to trace the history of micromanagement – a euphemism for interference – of banks in the post-Independence era. It can be broken up into two clearly demarcated parts: pre- and post-1991. The earlier period can be described as the era of social control of banks (the RBI then did its own version of micromanagement through stringent credit policies) and directed lending, whose extreme manifestation was the loan mela. The golden period for public sector banks was 1991-96, when official and non-official interference reached a minimum under the finance ministership of Manmohan Singh.
The history thereafter has been chequered, marked by ups and downs with changes of guard. Yashwant Sinha was an old-style functionary who combined the lesser attributes of both a civil servant and a politician. Jaswant Singh, who had a relatively short run, had a somewhat imperious style which stayed away from the nitty-gritty. P Chidambaram combined efficiency with a sharp intellect. The number of phone calls, to use a metaphor, was low in his time, but not non-existent.
Thereafter came Pranab Mukherjee’s reign, which has marked a return to the good old days. He can be described as an unreformed old-style politician whose redeeming grace is a touch of elan in the style of functioning, like something that tastes beguilingly good but is not healthy. The current bout of interference can be laid at the doorstep of overzealous civil servants. One particular gentleman is said to consider his job to be solely that of driving bank chiefs from 10 a m to 5 p m. But at the end of the day, a minister has to take responsibility for what senior officials under him are up to.
With the willingness to interfere goes the willingness or need to oblige. The norms for the selection of bank executive directors have been revised in recent years. The more posts there are, the merrier. Once upon a time, a bank had one executive director. Then came two in some cases — and now some banks have three executive directors. And it is from among them that the bank chiefs are chosen.
Tales abound (unverifiable, of course) on what has been happening. Over time the price of a bank chief’s post has become standardised, directly proportional to how weak or strong and small or large a bank is. An aspirant cannot, of course, fund this price himself and so has to turn to his important borrowers. They make the “investment” for him and also get large accommodation for group companies. In time these becomes non-performing assets (NPAs) and are first restructured and, eventually, virtually written off.
The volume of NPAs of public sector banks has lately been going up. This could have resulted purely from the present economic slowdown. But clearly, if there are more NPAs to restructure and eventually write off, then there is that much more scope for bank chiefs to oblige those who have obliged them earlier.
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The contrast between then (the initial reform years) and now is striking. The way the banks have bent over backwards to accommodate Vijay Mallya over Kingfisher Airlines, with little prospect of the outgoings ever being recovered, is telling. Against this, recall the folklore surrounding the choice of a chief of State Bank of India in the mid-nineties. When the pressure from a leading NRI business house for selecting the head of another bank became excessive, Manmohan Singh is said to have taken the file personally to Narasimha Rao and secured the appointment of the appropriate in-house aspirant.
With the health of public sector banks declining – significantly, that of new private banks is not – on account of rising NPAs, it is urgently necessary for bank managements to function professionally. There is nothing the government can do, which it cannot legitimately do as majority owner, through board-level action. Hopefully, with Manmohan Singh now holding the finance portfolio, good practices will return.