Transfin.
HomeNewsGuidesReadsPodcastsTRANSFIN. EOD
  1. Reads
  2. Lite

RBI Governor Spot-On: Bail-out Isn’t Free Lunch

Founder and CEO, Transfin.
Dec 7, 2017 11:21 AM 2 min read
Editorial

No surprises yesterday at the Reserve Bank of India’s (RBI) decision to keep the repo rate on hold at 6%, considering recent inflationary winds and indications of recovering growth. However, it was Governor Urjit Patel’s reform based assertions which caught the eye.

 

The government’s decision to recapitalize NPA stricken public sector banks (PSBs), though necessary, stays a half-measure without governance reform on the side. Behind every loan that eventually went bad, there were bankers, committees and Finance Ministry officials who were complicit. A lot of these decisions took shape thanks to wrong incentives and failed processes. The Banks Board Bureau (BBB), originally envisaged to investigate and fix these structural lapses remains a toothless tiger.

 

In this backdrop I had earlier argued that any recapitalization proposal should be used as a bargaining chip to push for management restructuring and governance reforms within the PSBs. It is a breath of fresh air that the Governor’s statement yesterday resonates this point.

 

Changes in decision making must trickle down from the top. The Finance Ministry needs to decouple itself from commercial matters and put in place an arms-length oversight mechanism to monitor PSBs. It is high time the Bank Investment Company proposed in the PJ Nayak Committee Report recommendations is setup. Day to day management of PSBs should be left to in-house professionals.

 

Board level appointments should be from the industry instead of civil servants / Ministry officials. Like any majority shareholder, the Ministry should care primarily about capital allocation and Return on Equity (ROE), leaving the rest to the appointed management.

 

The global banking crisis has shown that governments will ensure banks “too big to fail” will be bailed-out. But, there ain't no such thing as a free lunch.