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This could well be advice from Reserve Bank of India Governor Raghuram Rajan to the next government, on autonomy for public sector banks (PSBs). He said on Tuesday that PSBs could raise money much more easily from the markets if they became competitive, by distancing themselves from the influence of the government, without sacrificing their public character.
"Indeed, the better performers will be able to raise more, unlike the current situation where the not-so-good performers have a greater call on the public purse," Rajan said while delivering the annual day lecture of the Competition Commission of India.
During a talk on 'Competition in the banking sector: Opportunities and challenges', he also implicitly backed India Post's desire to enter the segment, saying it could happen when differentiated licences were made available.
The governor also said the central bank was examining the issue of changing the priority sector norms, and would also soon come out with a relaxation of guidelines for business correspondents.
On PSB autonomy, Rajan referred to the recent P J Nayak committee recommendations and said there was a need to examine all these. The panel had suggested PSBs be run under a new governance structure to compete successfully and avoid excessive dependence on government recapitalisation.
The governor said a number of eminently practicable suggestions had been made to reform PSBs. Among these were creating a holding company to hold government PSB shares, increasing the length of the tenures of chief executives (CEOs), splitting the position of chairman & CEO, bringing more independent professionals on bank boards and empowering boards with the task of selecting a CEO.
PSBs, said Rajan, were in a worse position than their private counterparts in attracting human resources. In the past, he said, PSBs had the best talent; today, past hiring freezes had decimated their middle-management ranks, with private banks having also poached talented personnel.
He advised state-owned banks to recruit laterally. "But, to do so, they need to be able to promise employees responsibility, as well as the freedom of action."
Later, taking a question on PSB consolidation, he said, "We should be open to some voluntary mergers. But, we have to be careful about the mergers where there is no synergy."
Bank licences
After granting a universal banking licence to only two applicants, Rajan said RBI will come out with a more regular process of giving licences on tap. However, for a universal licence, one needed a reasonable track record and reasonable amounts of capital. More of a chance could be taken with new players if they got a licence to open only a small bank or to conduct only one segment of banking. Here, he mentioned India Post. "For example, the proposed Post Bank could start as a payments bank, making use of post office outlets to raise deposits and make payments."
He said the central bank could experiment by allowing a few payments banks and monitoring their performance. "RBI proposes to discuss further steps with stakeholders in this regard," he said. If payments banks were successful, they'd allow RBI to steadily reduce some of the obligations imposed on commercial banks. "For instance, as payments banks hold government securities for liquidity purposes, we can reduce the quantity of government securities we ask commercial banks to hold as part of SLR (statutory liquidity ratio)."
The Nachiket Mor committee on financial inclusion had also recommended setting up of payments banks.
Financial inclusion
On priority sector norms, he said: "Can we allow banks to fulfill existing norms more efficiently? For instance, if one bank is more efficient at rural lending, can it over-achieve its obligations and then “sell” its excess to another bank that is an underachiever? We are examining such possibilities."
He said the priority sector obligation will probably be necessary for more time in a developing country like India, though there is a need to deliberate more on what sectors should constitute a priority as the economy develops. Domestic and foreign banks with at least 20 branches have to lend 40 per cent of their total net credit to priority sectors, which currently include agriculture, micro and small enterprises, and advances to weaker sections. For foreign banks with less than 20 branches, priority sector lending has to be 32 per cent of the total net advances.
He said RBI would soon come out with new relaxations on business correspondents. "We have had only limited success in achieving inclusion when it is seen as a mandate. Banks sometimes open branches in remote areas but the officers that staff them do not really reach out to the local population; banks open no-frills accounts but many lie dormant."
The reality, he said, was if the mandate is unprofitable, banks will find ways to avoid these. Not all forms of inclusion can be made profitable but we should give banks the freedom to try new approaches, perhaps drawing in other institutions (non-goverment bodies, micro finance institutions) that can traverse the last mile to the underserved where necessary.
