Going by the laundry list that public sector banks put out after their two-day brainstorming session—Gyan Sangam—in Pune last week, they haven’t really asked for more than what is rightfully theirs. Any lending institution would want to be able to operate with a certain degree of freedom but the truth is that governments, over the years, have interfered in the working of PSU lenders, whether in pressuring them to sanction loans to specific business groups and industry segments like infrastructure or by way of loan waivers. Autonomy, therefore, is among the key demands of lenders together with an environment in which they can defend their decisions. That the prime minister and finance minister have both committed to not meddling in the business of banks, going to the extent of saying there would be no ‘phone calls from the PMO, let alone anyone else’, must be indeed reassuring.
While there is no reason whatsoever to doubt the government will honour its word, simply staying away from banks is not enough. The government must put in place a structure that will allow lenders to function freely, empower and strengthen their boards, and most important, make them independent when it comes to raising capital. The PJ Nayak committee, set up by RBI to review the governance of boards of banks, has already suggested the government prune its stake to less than 50% and create a holding company—Bank Investment Company, incorporated under the Companies Act—to which it should transfer not just its shares but also the powers in relation to the governance of the banks.
This is one of the surest ways to usher in better governance and address the problem of dual regulation of the banks by the government and RBI—regardless of which party is in power. The official statement released at the end of the workshop said the government was open to bold decisions in terms of professionalising bank managements and autonomy in decision-making and was willing to reconsider the rules; the best way to demonstrate its desire to reform the banking system would be for it to let go some of its stake in the PSU banks—PSU banks suggested government shareholding be reduced to below 51%. Once bank boards are strengthened, the rest will fall into place. At a time when many of the lenders are short of capital, and the government is unable to meet their needs, a new structure, shorn of encumbrances—the CBI and CVC oversight, for instance—would help make them more robust entities that are attractive to investors. Indeed, the value of the government’s stake may rise even as the absolute holding falls.