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View: Budget must outline more banking reforms

Recently, RBI Governor Shaktikanta Das rightly underscored the need for governance reform in public sector banks that are reeling under bad loans.

“It is important to enhance the quality and stability (in PSB boards) through further streamlining appointment process, succession planning and compensation. These aspects could be evaluated by bank boards and reviewed by the Banks Board Bureau. We also need to create a pool of independent directors across various areas of expertise, Das said in his recent convocation address at the National Institute of Bank Management in Pune.

The govt, as a majority shareholder, should make this happen. Three years ago, it had outlined an ambitious plan, known as Indradhanush, to improve the functional and operational autonomy of these banks where politicians and bureaucrats are said to wield a lot influence. The BBB is meant to stop such interference.

But what needs to be done quickly is to vest ownership of all banks in a single holding company, assign BBB as its board and leave it to appoint the PSB boards. Hands length ownership will be good for the holding company.

The government can continue to be a majority owner with 51% stake, and the balance can come in as private capital that includes foreign capital. The holding company can tap the market for funds and raise large doses of capital for infusion into banks. This will help banks grow so they can lend more and get the wheels of the economy moving.

Such a structure will enhance the functional and operational autonomy of banks that need to take the right commercial decisions. The compensation for senior bankers should also hinge on performance. Large chunks of their salary must be linked to the bank’s performance over a longer period of time, and, of course, with clawback provisions. This will motivate them to work without fear.

Independent directors in the boards of banks should have domain expertise for sure. But they must also be capable of thinking independently and challenging the management if the need arises.

The creation of a holding company for banks should come as a part of the Budget announcement.
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