An incomplete rainbow

Till that happens, we will be in a state of indeterminacy or the observer’s paradox, much like Schrödinger’s cat. We would not know if the cat is dead or alive till we break open the box.

Written by Pratip Kar | Updated: September 5, 2015 7:23:10 am
Indradhanush plan, Indradhanush, Schrödinger’s cat, P.J. Nayak Committee, PSB, public-sector bank, pratip kar, indian express columns PSBs face three stark realities and their weak governance is the underlying cause.

The Indradhanush plan announced by the government with flourish, as measures usually are, is a positive initiative. Indeed, none can have any quarrel — one may question the adequacy though — with any of the seven aspects of the plan. Its success, and hence the brightness of Indradhanush, however is a function of the effective implementation of each of these aspects. Till that happens, we will be in a state of indeterminacy or the observer’s paradox, much like Schrödinger’s cat. We would not know if the cat is dead or alive till we break open the box.

But that should not make us withhold an examination of the plan. And it would be prudent that the evaluation be independent of the report of the P.J. Nayak Committee on bank governance, even though the report — a very comprehensive roadmap for PSB (public-sector bank) reforms, but strangely not referenced in any public pronouncements of the government — covers all the underlying concepts and ideas of Indradhanush, comprehensively analysed. It would also be pragmatic not to ignore the current political realities confronting the government, which constrain its functioning and perhaps force upon it a choice to consciously avoid decisions that require legislative sanction. Equally, it should not be lost upon us that several of the economic reforms of strategic importance, especially between 1992 and 2004, were successfully implemented through well-calibrated administrative fiats rather than legislation.

Two questions then become relevant. One, have all the areas of PSB reform that can be implemented without legislative changes been exhaustively explored? Second, would the present Indradhanush plan be followed by another? The answer to the first is not in an unequivocal affirmative, as a diagnosis of the present governance woes of PSBs would demonstrate that many of these arise from externally imposed constraints and are within the power of the government and RBI to address. For the second question, one has no choice but to patiently wait.

PSBs face three stark realities and their weak governance is the underlying cause. First, notwithstanding the development goals — social welfare and financial inclusion, which PSBs would necessarily have to pursue at the behest of the government as the sovereign owner, although they are largely uncompensated for pursuing such goals — it’s difficult to argue that the government’s style of running its banks has served either itself or the banks well.

Second, the dangerously high leverage of PSBs, politically connected wilful defaulters, the burgeoning stress in the balance sheets and the consequent deterioration in the supporting capital, declining profitability and productivity ratios and the dwindling market share of PSBs, are debilitating these banks and making them unequal competitors vis-a-vis their private-sector counterparts. Third, as the major share of financial savings is intermediated through PSBs that are also the dominant purveyors of loan finance for infrastructure-creation and manufacturing, continuous weakening of their balance sheets is a cause for concern that is far too serious for complacency. One would like to presume that these concerns are acknowledged by the political system and bureaucracy, although that doesn’t become eminently apparent from Indradhanush.

Against this bleak backdrop, the plan’s seven elements appear to fall short and are sketchy. The filling up of vacancies of CEOs and non-executive chairpersons for six banks is an excellent beginning. But it cannot address the problems of governance of the boards and the rest of the organisations unless buttressed by complementary measures. The setting up of the Bank Board Bureau to professionalise the appointment of whole-time directors and non-executive chairmen of PSBs is a good measure. But there’s little clarity on the bureau’s governance, its functions, powers, selection of members and especially its operational independence, given that three members will be officials.

The infusion of capital is necessary. But doubts arise about the adequacy of the infusion and the government’s ability to adhere to the infusion schedule that extends till 2018-19. The relationship between capital infusion and bank performance is also not apparent. De-stressing of PSBs is vital, but the plan offers nothing concrete except what might hopefully accrue if the circulars and the decisions taken in various government meetings are implemented.

The empowerment of PSBs is an eminently desirable step. But the signals are conflicting. What the government gave on one hand by declaring that there will be no interference from it, it may rob on the other by attempting to semantically distinguish between interference and intervention.

Rainbows in the sky have, through centuries and cultures, given birth to legends and mythological tales and inspired poets. But rainbows are nature’s ephemeral illusions. Economic or financial reform packages are not. It’s important that the Indradhanush plan become a well-founded material reality, even while retaining the romanticism embodied in its name. For this, some choices need to be made, however hard these may be.

The writer is a former executive director of Sebi and a member of the P.J. Nayak Committee on Bank Governance

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