PSB 2.0: Banks Board Bureau should have reported gaps in the mandate, says Ashvin Parekh
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
SS Mundra, Former Deputy Governor of RBI and Ashvin Parekh, Managing Partner at Ashvin Parekh Advisory Services discussed with Latha Venkatesh if the BBB’s complaints are justified and if the bureau can be used as a tool to improve governance.
Public sector banks (PSB) are at the cross roads, bogged down with over 15 percent of their book marked as stressed or outright bad loans. To add to this, a huge fraud at one of the banks, has also shaken confidence of both public as well as bankers. Therefore the question arising is, ‘is there a need to privatise banks’ or can we improve governance even under the current structure.
Last week Vinod Rai Chairman of the Banks Board Bureau (BBB) in a 50 page letter to the government argued that it is possible to improve governance and that his bureau had put forth plans on board composition, compensation of bankers, code of conduct, and business strategy, but the department of financials services has not even responded.
SS Mundra, Former Deputy Governor of RBI and Ashvin Parekh, Managing Partner at Ashvin Parekh Advisory Services discussed with Latha Venkatesh if the BBB’s complaints are justified and if the bureau can be used as a tool to improve governance.
Banks Board Bureau itself should have really looked at the original report, Dr PJ Nayak Committee report which it is again putting out in the compendium and they should have looked at the mandate and they should have at least pointed out the gaps in the mandate, Parekh said.
Below is the verbatim transcript of the interview.
Q: My primary question is that Vinod Rai says I have made these recommendations, I am awaiting reply from the Department of Financial Services (DFS). Have we made a mistake in the way the bureau is designed? Is it too toothless, too powerless?
Mundra:Â Let us spend some time going back to the beginning. This all started with the Finance Minister speech, in the Budget speech, and there if you look at it, the wordings were used that the bureau would be entrusted with appointment, search and select head of the public sector banks, and help them in develop the differentiated strategy. However, there was a very important sentence in that pronouncement that this would be an interim step which would move towards establishing a banking holding and investment company.
Thereafter government came out with the notification, and notification was again mentioning only about the appointment of whole time directors, and engaging with the bank boards for the strategies and the capital raising. At least if I look at the Budget speech, and this particular gazette notification, it was really not going beyond that.
However, having said that, thereafter the bureau in the initial phase, when it was being setup, I think it was from the preliminary discussion a viewpoint emerged that they should setup their own framework in which they will operate. As mentioned in Vinod Rai’s letter, they sent a whole list, but again, I see that four crucial points from that were again excluded i.e. appointment of non-whole time directors, the stressed asset resolution, moving towards the holding company. There was one recommendation that once they finalise the candidate, it should go directly to the appointment committee of the cabinet which was also not accepted.
So I think from the very beginning, the framework was carrying less mandate. Having said that, some of these are integral part. When you say engage with the bank board, prepare the strategies, or do the capital planning, these things cannot happen until and unless you engage with the majority owner, or the provider of the capital. So, in an indirect way, this was providing a framework to engage with the government.
So I would put it like this, strictly in the given framework, I think the mandate was very limited and it was for the bureau to take a decision in the beginning itself whether they would like to operate within that mandate or not. That is point one. However, since within that mandate also there was a room for engagement, I think it would have been fair for them that if they are making a recommendation, which are meaningful, I think they should have got a response to that.
Q: Do you think this board by design is wrong? It should be someone probably who is already in government, who has the mandate, maybe such an advisory body was always designed to flop?
Parekh:Â There are two parts to it. Can we say that it had to stop just as being an advisory body? For example, if it is just an advisory body, then once again as SS Mundra said, the matters will have to go back to the shareholders, the majority shareholders, in which case the majority shareholder decides. I thought therefore giving more powers or let us say a larger mandate to this body was very essential. That is the first point.
The second point is, perhaps and of course it is easy for me to say this, but let us say that Banks Board Bureau (BBB) itself should have really looked at the original report, Dr PJ Nayak Committee report, which it is once again putting out in the compendium and they should have really looked at the mandate and they should have at least pointed out the gaps in the mandate. For example let us say to suggest that these are the areas where unless the government engages, and unless I get decisions, it is difficult for BBB.
So I would have rather that instead of let us say this being a compendium, if it was an action taken report on the side of all the stakeholders, and say this is the action the stakeholders have taken, it would give the nation a clear understanding of the gap.
Q: A more fundamental question therefore, is this not way to go ahead at all? Do we just have to recognise that owner controls, therefore change ownership. We have no hope for reform unless ownership is brought below 50 percent. Is that a fair point to take?
Mundra: No, I don’t agree with that. Maybe at some point of time that may be the road, and that may be the ultimate destination, but given the environment, circumstances, and various other factors where we are operating today, I do not think it is something which would be desirable to happen in the short run and I have spoken on this. The point what I believe actually that there are ways where the separation of ownership and management can still be achieved. It is not something which is not happening, there are several examples in the globe where this is happening.
I think from that perspective, that concept of bank holding company, was something which should have been perceived. This is exactly what was mentioned by the Finance Minister in the original speech also where the concept of banks board bureau was first introduced. So I think that should be the roadmap and then as I did mention, in the first step, you have the bank holding company which is the majority holding, having the majority holding in the banks, and government is having the majority holding in the holding company.
In the second step, bank holding company may not have the majority holding in individual bank, while the government continues to majority holding in the holding company. In the third stage, at both the levels, the majority holding is removed. I think that could be a roadmap. This roadmap may take some time, I think it will have advantages of both the situation and it will take the way which can be implementable considering all the ground realities, the political sensitivities. I think in my view that should be the roadmap.
Q: What would your thoughts be, there are an equal number of people who believe that all this is half way house, just bring down the stake, that is the only way to change, otherwise owner calls the shots. What would you say?
Parekh:Â I do not think that is the real issue. If you really asked me, the acceptance of the fact that the ownership and the management can be separate or can be separated is the first acceptance. Now, time and again we have seen for instance, let us say the government in many cases may have reduced its holding to 52-53 percent, yet when it comes to making major decisions, do we really go about the whole thing like the way any listed entity is going about it?
Q: I was arguing for under 50 and many people have argued that the only way this thing changes is bring it below 50.
Parekh:Â But anything more than 26 percent technically still puts the government or the shareholder at a point where they can really do what they please to do. That is one part.
The second part I thought, somewhere along we are all missing out one important point, ownership is associated with a certain order of liability and responsibility. If the government wants to keep 51 percent, there is nothing wrong. Politically if the environment is not conducive, and if you cannot bring it down to anything less than 51 percent, then at least accept the fact that there is a larger responsibility of restoring capital and the capital must be brought in proper form then in that case, so, continuous responsibility.
Q: You were saying that you can fix governance even with 51 percent ownership. The reality is I do not see the government changing the BBB to a holding company anytime soon. It doesn’t look like it is politically on the table. Which of Mr. Rai’s suggestions do you think can still make a very big difference? We could start with his compensation or composition of board itself. Do you think some of these can be immediately put into practice?
Mundra: Not changing the fundamental issue of structure of control and expecting these various things can be implemented. To my mind it would be a difficult call. I think the very first requirement is the composition of the board of directors and if the board of directors will continue to remain in the way as they are today and to expect that there would be a great deliverance of corporate governance, there would be a great infusion of specialisation of the insight. I think that will be, to put it very mildly, they will be expecting too much and that is why if there is a complete separation as far as individual banks are concerned, their individual working is concerned and that can all be handled at the level of holding company while at the holding company level government can have the control and larger developmental mandate which can operate from there.
Q: You are nicely saying that this experiment is not going to succeed so there is no point even try to make this kind of a BBB work?
Mundra: What I am trying to say is what is put in the document is long wish list. There are many things. All the suggestions are excellent but if you look at most of those suggestions, what is already in existence for the other organisation either under Companies Act 2013 or the Listing Obligations and Disclosure Requirements (LODR) of Sebi 2015, all those things are there and he himself has mentioned that precisely these points have been raised from time to time and they have not happened till now, I really find it difficult to believe that suddenly how all of them will again become operational, is my point.
Q: What is your sense? This government has another 13-15 months before it has to renew its work permit as it were. Can any of these actually happen or do we just have to allow the situation to meander in dereliction?
Parekh: It can happen. If you go back to the report, there is a very interesting observation that has been made. They say that in a normal course from good governance principle it is important to recognise that nominee directors are not independent directors. That is the first important point. So leave aside the format.
Q: But that will not change because the banking undertaking act is not going to change?
Parekh: Therefore, if the government were to agree that the composition of the board has to have independent directors and the independent directors must be chosen independent of the shareholders’ requirements or wishes for instance. The minute, I suppose that acceptance is there then you can go forward. So it is just a matter of saying that nominee directors – when you constitute the board…
Q: You will only pick those who qualify as an independent directors under the Companies Act?
Parekh: Then it’s not picked up by the government. It has to be picked up by an independent body which is what the report is talking about.
Q: Which is what the BBB ought to be?
Parekh: Exactly.
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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow
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