Tamal Bandyopadhyay: 'Krishna Chandra's' dilemma

On the way to Delhi airport in the evening to a catch a flight back to Mumbai last week after attending a meeting with Finance Minister P Chidamabaram, one bank CEO told another the following story.

Once upon a time, there was a king who ruled Bengal called Krishna Chandra. He was large-hearted, honest and believed in the concept of the welfare state. His close friend, who shared his ideas, was his court jester Gopal who happened to be the wisest man in the royal court. Krishna Chandra used to consult Gopal everyday to solve tricky issues.

During the winter session of the court, Gopal started attending late and the king found it difficult to pass some of the resolutions in his absence. One day an impatient king asked Gopal why he was so unpunctual.

Gopal told the king that he had been playing a game of "back and forth" every morning. He was helpless because he could not do without it and asked the king to join him for the game the next morning.

Krishna Chandra duly visited Gopal's house the next day to find him sitting near a charcoal fire in his backyard. It was a cold day, so the king joined Gopal near the fire.

When the flames abated a bit, they drew closer; when fresh coal was added and the flames flared up, they retreated a bit. This to-ing and fro-ing continued for some time, as a result of which the King was late for court.

The king's predicament in this fable is a bit like the position in which Chidambaram and Prime Minister Manmohan Singh find themselves when it comes to liberalising private banking. The Left (the "charcoal fire" in this case) determines the government's stance.

When the pressure from them abates, the finance minister takes a few steps forward and announces that new norms on foreign direct investment in private banking would be announced within days. But as soon as the Left raises questions and objections, he takes a few step back. The result: neither he nor the prime minister can actually announce the changes in Parliament.

Now, the finance minister and the prime minister could well find themselves facing Krishna Chandra's dilemma over liberalising public sector banking. This was evident from the rather radical agenda of a stock-taking meeting that the finance minister called of public sector bank CEOs last week.

That's because Chidambaram flagged off the meeting with a topic that is closest to all bank CEOs' hearts "" the creation of a level playing field to allow them to compete with private and multinational banks, principally by lessening government interference.

This was the focus of a confidential finance ministry note, circulated among the bank CEOs, which talked of "allowing operational flexibility and functional autonomy [to the public sector banks] on lines comparable with their global counterparts and those in the private sector in India".

It adds, "There should be a clear demarcation between the roles of the owners, the board of the banks and the executive management."

Indeed, the note displays a distinct change from the traditionally anodyne language of the bureaucracy. It says, for instance, that "the objective should be to ensure the banks function on sound principles of corporate governance. The key issue is to design a framework in which the government is allowed to exercise its ownership rights without transgressing into the management functions of these banks."

The fact that the government is sensitising itself to market realities is also evident from the following paragraph: "The government now owns 100 per cent equity only in four of the 19 nationalised banks. The existence of private shareholders in these banks imposes a responsibility on the government as the majority shareholder to enhance shareholders' value and protect minority shareholders' rights. The government needs to create an environment conducive for the banks to raise additional funds from the market...."

Among other things, the ministry is planning to allow bank boards freedom to adopt a performance-linked differential pay structure in certain segments.

If it sticks to the proposal, then top executives will also be freed from seeking government approval every time they go overseas to meet investors and hold roadshows even though "details of the visit and the exact number of days of absence" need to "intimated to the government before their departure". These are minor but important issues.

The most important proposal for managerial autonomy is to free the public sector banking industry from the clutches of Central Investigation Bureau (CBI) as well as Central Vigilance Commission (CVC).

The finance ministry wants the senior executives of public sector banks to take decisions based on "sound professional considerations without any undue fear of outside agencies".

It is also showing its awareness that "bank executives, being part of a commercial organisation" are required to "take risks for business growth and development".

The note says, "To provide a level playing field with private sector banks, public sector bank officials may be taken out of the purview of CVC and CBI and subject to the laws of land as in the case of the any other company." The government will be required to move for legislative amendments to keep bank executives out of the CBI net.

Some time ago, bank officers up to scale IV (that is chief manager, below the level of assistant general manager) were taken out of the ambit of CVC. However, that has not helped much since the sanctioning power of officers at the lower level is limited.

Moreover, on every critical issue "" like appointment of consultants or software vendors "" the public sector banks go by the CVC rule (popularly known as L1 approach) which stipulates that the lowest bidder should get the job. In other words, quality of service is never considered while offering these contracts.

Eight years ago, the Reserve Bank of India allowed banks limited freedom in terms of posting employees overseas, campus recruitments, fast track promotions and so on.

However, the first phase of this autonomy to banks was conditional. Only those banks that had earned net profit for three consecutive years, had a capital adequacy ratio of more than 9 per cent and net non-performing assets of less than 9 per cent were allowed these privileges.

Since then the situation has changed. More banks raised money from the public and their balance sheets have become stronger. It is only natural that the government should think in terms of big-ticket freedom to public sector banks.

This should be a precondition to consolidation "" but much depends on how much the Left will approve this agenda. Otherwise, public bankers will find themselves in the same predicament as private banks as the government blows hot and cold on liberalisation.