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Public Sector Bank Boards Should Be Made More Accountable: Bimal Jalan

Time-based monitoring of the performance of public sector banks is essential, said Bimal Jalan.



Bimal Jalan, former governor of the Reserve Bank of India (Source: BloombergQuint)
Bimal Jalan, former governor of the Reserve Bank of India (Source: BloombergQuint)

Boards of public sector banks should be given greater autonomy and then held accountable for the performance of their individual banks, said Bimal Jalan, former governor of the Reserve Bank of India (RBI) in an interview with BloombergQuint.

Jalan, who was the governor of the RBI between 1997 and 2003, sees enough reason for public and private sector banks to coexist but calls for more ‘time-based’ monitoring of the performance of government-owned banks. He adds that while public sector banks should be accountable to the the government, who is their main shareholder, they must operate in a way that “government control over these banks is less.”

They (public sector banks) are accountable to shareholders and the government is a shareholder. But it is not the ministries which should decide. So this is a different issue I am raising – to give autonomy to the banks. Then appraise the performance. Monitor the performance and then decide whether they are doing what we want them to do in the country’s interest.
Bimal Jalan, Former Governor, Reserve Bank of India

Jalan echoes a demand made by chiefs of state-owned banks soon after the Bharatiya Janata Party (BJP)-led government came to power in 2014. At a Gyan Sangam held in January 2015, Prime Minister Narendra Modi promised bankers that his government would stay away from political interference in the banking sector. In 2016, the government set up the Banks Board Bureau (BBB) to help improve the quality of management appointment at banks.

The government, however, has stayed away from setting up a Bank Investment Company (BIC) which was proposed by a committee headed by former banker PJ Nayak in May 2014. BIC was proposed as a vehicle which would hold government ownership in banks, but would also put some distance between the government and bank managements.

While advocating greater autonomy, Jalan also said that “monitoring and accountability of performance” of public sector banks is essential.

Indian banks are in the midst of a bad loan crisis that came to light after the RBI conducted an asset quality review of the sector in 2015. Bad loans surged to over Rs 7 lakh crore as of the December 2016 ended quarter. Of this Rs 6.2 lakh crore are on the books of public sector banks.

The last time the Indian banking sector faced such a severe bad loan crisis was when Jalan was heading the RBI. At the time, gross non-performing assets had surged to near about 12 percent. What helped clean-up bank balance sheets at that time was a steep drop in interest rates during the Jalan governorship, which in turn allowed banks to provision against bad loans using gains made on their government bond portfolios.

Public Sector Bank Boards Should Be Made More Accountable: Bimal Jalan

While interest rates have been on the decline since 2015 as well, the drop is nowhere as steep as during the Jalan years. This means that banks have to seek capital from other sources such as government fund infusion and sale of non-core assets.

We should have acted earlier (on NPAs) but that one can always say in hindsight. It is a question of making a decision. What is happening now is welcome, good.
Bimal Jalan, Former Governor, Reserve Bank of India

Balancing Reforms With Personal Freedom

Commenting on economic reforms undertaken by the government, Jalan said the reforms are welcome and should be appreciated. He, however, cautioned that the push for reforms must be balanced with personal freedom.

The reforms measures that have been taken, they are welcome and we should appreciate them. But like everything else, there are two sides to the coin. The second part of it is - does it impinge on individual freedom to do what we might want to do?
Bimal Jalan, Former Governor, Reserve Bank of India

Reforms must also be carried out in a way that individuals are not inconvenienced unnecessarily, said Jalan. GST and demonetization are two such examples where the reform measure must be implemented in a way to minimize the inconvenience to people.

When asked whether the resilience of the economy during the demonetisation process had been surprising, Jalan said that stable GDP growth during that period was contrary to expectations. The Indian economy grew at 7 percent in the October-December quarter despite the government’s decision to withdraw 86 percent of the economy’s currency in circulation as part of its demonetisation announcement.

It is not surprising post-facto. One is happy post-facto. But if one had been asked to give a projection, then even the most optimistic estimate was that GDP would have fallen. But it hasn’t fallen. Now its an entirely different question whether it would have been 7.5 percent or 8 percent without demonetisation. But those questions, in economic terms, are unanswerable.
Bimal Jalan, Former Governor, Reserve Bank of India