This is an archive article published on July 5, 2016

Opinion Letting go

Government proposes a holding company for public banks. It must give it autonomy for the move to work.

Raghuram Rajan, rbi, reserve bank of india, India central bank, banks, india banks, india finance

July 5, 2016 12:45 AM IST First published on: Jul 5, 2016 at 12:42 AM IST

The Reserve Bank of India’s reported unease with the government’s proposal to set up a Bank Holding and Investment Company (BHIC) comes at a crucial moment in the unfolding banking crisis in the country. Public sector banks, in particular, have been admitting to rising levels of non-performing assets on their books. At one level, the RBI scepticism is surprising. After all, the move to institute a BHIC is broadly in line with the P.J. Nayak Committee report, commissioned by the RBI, that was submitted in mid-2014. The committee had reviewed the working of bank boards in the country and given a damning indictment of the shoddy governance in public sector banks, which account for almost 70 per cent of the sector.

The proposed BHIC, which would hold the equity of all public sector banks, is intended to raise capital for the PSBs and thus reduce the government’s burden of capitalising state-owned banks. According to finance ministry estimates, given the

NPAs, the PSBs would need Rs 1.80 lakh crore by March 2019 to meet Basel III norms. However, the government plans to provide only Rs 70,000 crore and the rest would have to be raised from the market. But this is not the only reason for creation of the BHIC. In fact, the BHIC is the next step after the creation of the Bank Boards Bureau, headed by former CAG Vinod Rai, after the finance minister announced in his budget speech last year that “this (an autonomous Bank Board Bureau) would be an interim step towards establishing a holding and investment company for banks.” But the BHIC’s mandate, according to the Nayak report, was expected to be wider than raising capital. It was intended to distance the government from the functioning of PSBs. It was expected to reform and empower bank boards while protecting the government’s investment in the PSBs.

The RBI is reported to have called the proposed BHIC a “sub-optimal” solution, primarily because investors “will not like” the idea. The central bank feels it will be difficult for the BHIC to define clear criteria for distributing capital among the PSBs. If the history of the government’s interference in the functioning of public sector banks is anything to go by, such fears may not be misplaced. In the end, what will determine the success of the Nayak committee recommendations will be the quality of personnel chosen by the government to populate the BHIC as well as the freedom provided to it. Without those two conditions being met, reform will be a non-starter.