Insights into Editorial: Banks Board Bureau: Old wine in a new bottle?

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Insights into Editorial: Banks Board Bureau: Old wine in a new bottle?

02 May 2016

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Summary:

Finance minister Arun Jaitley announced in August 2015 the plan to set up the Banks Board Bureau (BBB) as part of the Indradhanush programme to revamp state-run banks. In February 2016, the proposal of the Department of Financial Services (DFS) for the constitution of the Banks Board Bureau was approved and thus the bureau was established. Former CAG Vinod Rai was appointed as the first chairman of the bureau.

About BBB:

The bureau was set up as an autonomous body. It will have three ex-officio members and three expert members, in addition to the Chairman.

Important functions performed by the Bureau:

  • Recommend appointments to leadership positions and boards in PSBs and advise them on ways to raise funds and how to go ahead with mergers and acquisitions.
  • Constantly engage with the boards of all 22 public sector banks to formulate appropriate strategies for their growth and development.
  • Search and select heads of public sector banks and help them develop differentiated strategies of capital raising plans to innovative financial methods and instruments.
  • Be responsible for selection of non-executive chairman and non-official directors on the boards.
  • Steer strategy discussion on consolidation based on the requirement.

Background:

This idea was first mooted by a committee set up by the RBI to review the governance of bank boards. The committee was headed by former chairman and managing director of Axis Bank Ltd P.J. Nayak. In May 2014, the committee suggested the formation of the bureau as a first stage in a three-phase process to empower the boards of public sector banks.

  • The committee noted that the bureau would advise on all board appointments, including the whole-time directors and the top bank management, to professionalize and depoliticize the appointment process.
  • The members of the bureau would have a tenure of three years or until powers are passed on to the bank investment company, whichever is shorter, and their remuneration would at least be on a par with the senior bank chiefs, the panel had recommended.

Why this was a good idea?

The bureau has been set up at a time when public sector banks are grappling with a huge problem of bad loans with their collective gross NPAs (Non Performing Assets) approaching Rs. 4 lakh crore level. Saddled with a large pile of bad assets, public sector banks need dollops of capital. They also need to focus on sharpening efficiency and strengthening corporate governance. The Bureau is mandated to play a critical role in reforming the troubled public sector banks.

What else needs to be done now?

  • Create a holding company to manage the government’s stakes in the public sector banks and facilitate consolidation in the sector.
  • Open up the banking sector further and explore options of allowing different types of banks to set up shops.
  • The bureau should also have a say in the selection of independent directors of boards without which it will be difficult to help these banks develop strategies and raise capital as many directors on the boards of various banks neither understand strategy nor do they lend credibility to their institutions.

Challenges:

The investment company can be set up only after legislative changes. For instance, the Bank Nationalisation Acts of 1970 and 1980 and the SBI Act and the SBI (Subsidiary Banks) Act need to be repealed and all banks need to be incorporated under the Companies Act ahead of this. This is a long-drawn process.

Conclusion:

It will not be easy to raise capital unless the government plans to overhaul the way public sector banks operate and this cannot be done by merely asking the bureau to select bankers for the top jobs. The government must clarify whether it is an intermediate step towards setting up the investment company, and if it is, then the scope of work must be widened to include the appointment of independent directors of the board, as envisaged by the Nayak committee. It also must look at the tenure of the managing director and the chief executive and the compensation of senior bankers, among other things. Finally, the process of appointment must also change.