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Banking Reforms in India: Is Vinod Rai's Banks Board Bureau (BBB) a Toothless Tiger?

Advocacy Consultant
Nov 10, 2017 12:47 PM 5 min read

In August 2015 the Government launched a seven-point plan to fix the ailing banking system in India. Dubbed Mission Indradhanush (loosely based on the PJ Nayak Committee recommendations), the plan suggested a massive recapitalization of public sector banks (PSBs) to combat the systemic headwinds posed by non-performing assets (NPAs) on their balance sheets.


After providing lip-service for almost two years, the Finance Ministry, taking stock of slowing credit and economic growth, finally decided to announce a INR2.11 Lakh Crore recapitalization programme. Now whilst this may assist the recovery of stressed banks, the move will be reduced to a bandage solution without an overhaul in corporate governance.


The Problem


Distressed assets in India is an acute problem. Estimated at around INR10 Lakh Crore or USD154 Billion, this amount is more than the GDP of 137 countries. Trouble began in the aftermath of the 2008 global financial crisis when many Indian corporate houses struggled to pay back the loans they had taken in the bullish market preceding the crisis.


According to estimates, the top 10 corporate houses alone owe some INR5 lakh crores to banks in bad loans. Bad loans or stressed assets are loans that borrowers have stopped repaying and which show slim chances of recovery. By March 2017, the average bad loans of PSBs stood at 75% of their net worth. Experts believe that the problem is dragging down the Indian economy and poses a serious challenge to future growth and job creation.


The problem became so severe that the Supreme Court was forced to intervene and issue injunctions to recover stressed assets. The Government had to introduce a slew of measures including legislative measures such as the Insolvency and Bankruptcy Code 2016 and various schemes for restructuring of stressed assets.


It was against this backdrop that the PJ Nayak committee, which was instituted by the RBI to look into issues plaguing PSBs, submitted its report in 2014. The committee identified governance structure of PSBs as one of the prime reasons for the bad loans problem. The Government of India holds majority stake (> 51%) in PSBs and hence is in a position to exercise control over appointments of top executives of PSBs.


According to the PJ Nayak committee, this was a major factor inhibiting the rise of best available banking talent, as often political considerations overshadowed appointments to top level positions in PSBs instead of pure merit. To counter this, the committee recommended the setting up of a holding company called the Bank Investment Company (BIC) to which the Government would transfer all its shares.


The BIC would then have autonomy in appointing CMDs and directors to the PSBs, thus improving efficiency at the top level. However as this would involve repealing the various bank nationalisation acts that mandated the Government to maintain majority control over PSBs in the first place, the committee recommended that the Government establish a Banks Board Bureau (BBB or "Board").


The Board was to function in the interim, while the Parliament went ahead with the protracted task of repealing the said acts. Once the BIC came into effect, BBB was to be scrapped.


A Legacy of Conflict


The Board's creation was officially announced on Feb 28, 2016. It started functioning from April 1st 2016 as an autonomous recommendatory body. As part of its mandate, core responsibilities included recommending names for appointments of PSB Heads as well as helping banks to develop strategies and capital raising plans. Ex-CAG Vinod Rai was appointed as Chairman with 6 ex-officio members, all working part-time to assist him.


Unsurprisingly, both the idea and the working of BBB have come under criticism from experts ever since its inception. One line of reasoning for instance, pointed out that if appointments to PSBs were the main culprit for the banks’ dismal performance on NPAs, how come the banks continued to perform well ever since their nationalisation almost 5 decades ago?


However, the bigger challenge as critics have pointed out, is the operational difficulty of dealing with an executive reluctant to relinquish its hold over power. Over the last one year several key names recommended by the Board have not been cleared by the Government.


For instance last year, the Board had recommended Mukesh Kumar Jain a former director of Punjab and Sindh Bank to head Indian Overseas Bank (IOB). However the recommendation did not sit well with the Finance Ministry and the post was instead assigned to R. Subramaniakumar in May this year. Incidentally, IOB is one of the worst performers among PSBs when it comes to bad loans, with more than 22% of its loans having turned bad.


This set off a trend of high level reshuffles where BBB was either not consulted or if consulted, was overruled by the Government, including two high profile reshufflings at the PNB and Bank of India. The Board has also been involved in a power tussle with the Finance Ministry over an expansion of its mandate to include resolution of stressed assets to address the burgeoning problem of NPAs.


Despite Vinod Rai’s statements to the effect, the Finance Ministry has remained unmoved on its stance over the Board’s powers. On the contrary, in June, the Government announced that BBB would no longer have the power to recommend heads of Government-run financial institutions, limiting its mandate to recommending names for PSBs alone. There is thus a widespread feeling among experts that BBB has come to be little more than a paper tiger.


The fallout of this turf war with the Finance Ministry is slowly beginning to tell on BBB. It was reported earlier this month that Roopa Kudva, managing director of the Omdiyar Network India Advisors resigned from her post on the Board. Earlier in May, veteran banker H.N. Sinor had also resigned from his post, ostensibly due to disappointment over not being consulted by the Government while making key appointments to certain PSBs.


The Road Ahead


Though severely hamstrung in its functioning by the Government, the Board has put forward some key recommendations that could form the cornerstone for future reform in the banking sector. For instance in April this year, the Board had recommended revamping the pay structure of PSB employees including introducing performance linked bonuses and ESOPs.


It has also drawn up an elaborate roadmap to make PSBs more competitive vis-à-vis their private sector counterparts. Called the Governance, Reward, and Accountability Framework (GRAF) the plan aims to bring corporate governance models at PSBs in line with the Basel Committee on Banking Supervision.


While these recommendations have not yet been accepted by the Finance Ministry, the Board has done commendable legwork in putting forth these ideas in the public domain. 


BBB has only been around for little over a year. It would be unfair to expect it to shake up the system in such a short time. It is certainly true that it could have achieved a lot more had it been allowed to do the job it was created for. The problem faced by the Board is a systemic one.


Despite clarion calls for ‘minimum Government, maximum governance’, the executive in India is clearly not prepared to let go of its tenacious hold over power – a hangover of the totalitarian colonial state and the postcolonial quasi-socialist state that succeeded it. There is no dearth of talent and ideas to tackle India’s ailing PSBs. What is lacking is the political will to devolve real power to providers of solutions.


The massive recapitalization announced earlier this month, while certainly a much needed measure, appears to be a product of the same antiquated mindset that targets the symptoms but ignores the cause.


The PJ Nayak committee had recommended bold structural reform to enable PSBs to compete in a financial world whose contours are changing rapidly. Newer technologies like blockchain and the applications built around them such as cryptocurrency are threatening to change the face of banking as we see it today.


A cosmetic measure such as the present bout of recapitalization will not suffice. Only deep structural reform can enable our PSBs to become the lean, fleet footed players that are needed to survive in the new financial world that is emerging.