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Government Should Stay Shareholder, Let Boards Run Banks, Says Former SBI Chairman Rajnish Kumar

Government control over public sector banks should be eased for better governance, says Rajnish Kumar.

<div class="paragraphs"><p>Rajnish Kumar, former chairman of State Bank of India (Photographer: Simon Dawson/Bloomberg)</p></div>
Rajnish Kumar, former chairman of State Bank of India (Photographer: Simon Dawson/Bloomberg)

Governance at public sector banks can be improved if they're managed by boards and regulatory gaps between private and public lenders are bridged, said Rajnish Kumar, former chairman, State Bank of India.

"Just as an example, I don't think it's written in the act that there would be a Department of Financial Services. A public sector bank can be managed by its board and regulated by the Reserve Bank of India, as is being done for all the other banks," Kumar told BloombergQuint in an interview, after the launch of his new book The Custodian Of Trust.

Kumar's advice to the government is to play the role of an active shareholder, like institutional shareholders do in the case of private banks. Accountability, he said, will follow. "It's not that accountability comes only when you have direct control (of the government). It doesn't," Kumar said.

The government had announced the privatisation of two public sector banks in the Union Budget. Legislative changes for this are pending. Apart from this, the government is looking to sell stake in IDBI Bank Ltd.

Alongside privatisation, governance concerns must be addressed, said Kumar, adding that large corporate houses should not be permitted into banking.

The Infrastructure Burden

In his book, Kumar explains the problems with valuing and funding infrastructure projects and the lack of expertise in lending to this segment.

Infrastructure companies which were prominent till around 2010-11 saw rapid deterioration in the following decade, he wrote in his book. While the gap in risk assessment by banks contributed to the large defaults, policies of the government and promoter impatience are also to be blamed, Kumar wrote.

The introduction of a new development finance institution by the government will help resolve such problems, Kumar said during the interview.

"There is a need for a specialised institution with expertise in risk assessment and risk mitigation, so it can lead a consortium. Right now, that mantle is on SBI," Kumar said.

The DFI is likely to have more stability since, typically, officials at SBI are required to move departments within three years, leading to a gap in supervision of infrastructure projects, he said.

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A Word Of Advice

Kumar, who oversaw the rescue of Yes Bank Ltd., said there are lessons in the collapse of the lender for the RBI and the government as well.

"At the early signs of trouble, the Reserve Bank should have the capability to take action and not delay," Kumar said. "Second, there is a need that we put in a framework for resolution of financial firms, that legislation is still pending."

In the absence of a definitive framework, authorities have had to look for different ways to deal with stressed financial institutions like Infrastructure Finance & Leasing Services Group, Dewan Housing Finance Corp., Punjab & Maharashtra Cooperative Bank, Yes Bank Ltd. and Lakshmi Vilas Bank Ltd.

Apart from having a framework, there is also a need for a dedicated authority which deals with signs of stress across a complex and large Indian financial system, Kumar said.

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The Second Innings

After retiring from SBI last year, Kumar has taken up a few new assignments. He was appointed as an adviser to Kotak Investment Advisors Ltd.'s $1-billion stressed asset fund in February.

Kumar has also been appointed chairman of fintech firm BharatPe. The role, according to him, will focus on guiding the firm through regulatory and business realities, without impinging on the innovation which fintech firms bring.

BharatPe, along with Centrum Group, is in the process of rescuing PMC Bank. For this, the two partners have received an RBI licence to set up Unity Small Finance Bank, which will take over the assets and liabilities of the cooperative lender.

"The startups and fintechs in the country, they need guidance. They are brilliant people... When they grow beyond a point, it becomes a necessity to have governance and processes put in place. It is a very delicate task," Kumar said.

Watch the full interview here: