Tag Archives: RBI

All that is needed is political courage to clean up PSBs’ governance

It is important to take a close and hard look at how to clean up poor and ineffective governance of public sector banks

By Somasekhar Sundaresan

The last edition of this column spoke about the unaddressed vital reform of ownership of public sector banks that is holding back governance of these institutions to a body of law and an era that is out of sync with the legal regime that governs private sector banks. Meanwhile, a vibrant controversy has broken out with the Reserve Bank of India’s (RBI) governor and the Bank Boards Bureau chief publicly airing their views on the issue. The RBI governor’s lament about not having full powers to sack public sector bank boards does appear self-serving but does not deserve to be dismissed as wholly irrelevant.

Is fraudulent activity in any bank, public of private, a cause for introspection on what went wrong, and how it could have been prevented better by the regulator? Unconditionally, yes. Is the absence of power in the hands of the RBI to dismiss the Board of Directors the only reason for the fraud? No. Would the fraud not have occurred if the RBI had that power? Not at all — frauds could take place in private sector banks too despite the having the power to approve or sack the CEO.

Frauds can take place in any institution, regardless of how the institution is owned. However, how the institution is governed indeed has a role in whether it is prone to frauds. If frauds are rampant in public sector banks, despite bank employees being regarded as “public servants”, and despite government ownership resulting in stringent and draconian oversight of the central investigation and vigilance agencies, it would be reasonable to conclude that the model is indeed flawed, and needs to be fixed. Therefore, the biggest risk to a real systemic clean-up is a dismissal of any discussion on the need to reform ownership and governance of public sector banks, by branding the point as an excuse or justification of occurrence of fraud in these banks.

Therefore, what the governor says about dual oversight of public sector banks is correct. It would of course be self-serving to suggest that this naturally means the has no responsibility to bear, and that aspect would be incorrect. However, it is important to ensure that the duality of responsibility has to be cleaned up. As the saying goes — no man can serve two masters. In the collision of multiple truths, the clash of ideology in the approach to regulation, ownership and governance, can lead to losing sight of the important, overwhelmed by the immediate.The immediate often trumps the important, but it is really important to take a close and hard look at how to clean up poor and ineffective governance of public sector banks, and the approach of treating the board of directors as policemen instead of strategic overseers.

This government has many firsts to its credit in being resourceful with law-making — promulgating presidential ordinances to bring in substantive law; and effecting serious amendments to laws by embedding them in Money Bills (obviating the need to get the amendments cleared by the Rajya Sabha). The resourcefulness needs to be brought to bear with The pace with which new law on fugitives is being piloted ought to be repeated with cleaning up state ownership of and the attendant governance shortcomings.

At the least, a simple legislation to convert each of the public-sector banks into a public limited company governed by the newly-introduced (now nearly four years old) company law should be passed, which would bring each of these institutions under the more effective, uniform and standard norms of corporate governance that are applicable to private sector banks as well. Without this measure, simply building up a with an extremely ambiguous role — ranging from the problem to being the search-and-selection agency for staffing bank boards — would be of no consequence.

The next step would be to dilute state ownership in these banks to a minority holding. The vigilance and investigation oversight of these banks would need to end — they have failed to contain the scale of fraud on these banks, and worse, they have ended up terrorising honest bank officials into becoming indecisive, further hurting the interests of the bank. Bank officials involved in the credit appraisal and sanctioning function are known to trip before they rise up the ranks with their career records being spoilt by vigilance and corruption cases, leading to a vacuum in the leadership and a lack of available bandwidth for senior management.

The implicit sovereign guarantee underlying every public-sector bank is borne out by each of the banks being recapitalised with sovereign money. The capital market regulator is again issuing a series of exemption orders exempting the government from having to make an open offer under the takeover regulations upon infusing more funds into these banks, whose shares are listed on stock exchanges. Resolution of weak banks and spreading the commercial pain of bank failure across its depositors is a political hot potato only because of this implicit guarantee. Therefore, sovereign funding of these banks through new capital could come the next time with strings attached — the legislative changes discussed above. Since it would involve state funding, they would in fact be Money Bills. All that is needed now is political courage.

This column was published in Business Standard under the title Without Contempt in editions dated March 22, 2018

How lines of role clarity are getting blurred

By Somasekhar Sundaresan
The question of whether the Reserve Bank of India (RBI) can dictate terms to a quasi-judicial tribunal that presides over enforcement of loan recoveries is making news, with the Gujarat High Court asking how the central bank had the powers to regulate tribunals. That the RBI believed it could dictate terms to a quasi-judicial body is not important. What is important — rather, scary — is how easily role clarity can officially get mistaken in the running of our public institutions.


The foundational blunder that embeds wrong policy choice into the DNA and blurs role clarity is the Presidential that specially empowered the RBI to direct commercial banks on the action banks must take towards recovery of dues owed by borrowers. This is a classic example of a simplistic policy solution, which is an outcome of its authors presuming that everyone else before them had not been clever enough to see an obvious fix to a serious problem.


It is not the RBI’s job to take enforcement decisions for commercial banks. But having been given a cloak and a shining armour, the RBI perhaps came to believe that it could issue directions even to the National Company Law Tribunal on what it must do. Giving the RBI powers to direct banks on how to act under the newly-legislated Insolvency and Bankruptcy Code presumes that commercial banks were napping despite having been empowered by a new law. By vesting in the RBI the executive function of banks that it regulates, in other sectors, too, such interventions could follow. The insurance regulator could be asked to run insurance companies, the securities market regulator could be asked to operate mutual funds, and the pensions regulator may be asked to run pension funds.


Worse, the foundation has also been laid for vigilance agencies to knock on the doors of RBI officials, say, five years down the line, for bad decisions that were taken in the course of such enforcement. The banks’ problems will have become the RBI’s problems. This is a real possibility as the poor non-performing assets may provide next to no recovery, and buyers of some of these assets may make profits buying assets cheap — fertile ground for the Central Bureau of Investigation to say in the future that even the RBI has become tainted by corruption.


The RBI jumping in to notify a declaration on what the tribunal must do is also a replication of a classic policy choice in the past few years. The very creation of the National Company Law Tribunal, with powers to take serious judicial decisions such as award of damages as if it were a civil court, is based on the erroneous policy choice of creating new institutions to deal with problems that hurt the performance of existing institutions. Since justice administration is ineffective (due to myriad problems that cannot be reduced to populist reasons such as length of court vacations or lack of judges), successive governments have been getting to make empowering regulators to play the role of the  The requisite training and capacity building to discharge such roles are never invested in. Every disappointment with such experiments leads to even more egregious experiments, further blurring the lines of role clarity.


Examples abound. Sweeping powers given to capital markets regulator, the Securities and Exchange Board of India, despite being an executive organisation, to take serious quasi-judicial decisions without imparting judicial training, is a great example. Likewise, even the quasi-judicial tribunals that are being set up with serious responsibilities, face resource constraints. The National Company Law Appellate Tribunal is now empowered to play the role of an appellate tribunal not only for company law but also for competition law, as indeed in appeals from decisions under the new bankruptcy law.  However, the tribunal has just two members — one is a retired Supreme Court judge, the other a retired officer from audit and accounts service. One seat is lying vacant. The Securities Appellate Tribunal has been empowered to hear appeals against decisions of the insurance regulator, but it took forever for the government to even complete appointments to achieve a full bench.


When the alleged scam in the telecom sector was making news, many “creative” policymakers advocated involving the Comptroller and Auditor General in executive decision-making before a decision is made, so that the auditor does not later find fault with propriety of decision-making.  This was an example of how little inter-institutional checks and balances are appreciated and how easily they can get disrupted if the clamour for “change” gets loud enough to drown out reasoning.  Getting the banking regulator to take decisions that regulated banks must take on their own is in the same vein.


It is highly possible that sometime in the near future, desperation over capacity constraints in “insolvency professionals” not being able to cope with the burden imposed on them under the new bankruptcy law could lead to the Insolvency and Bankruptcy Board of India to being given powers to play the role of the professionals it regulates.  Nothing could be a bigger blunder in the gestation of a nascent ecosystem.  Such a measure would weaken the ecosystem of insolvency professionals, the same way commercial banks are being weakened today by having the RBI decide on their behalf how to handle bad loans.


In parallel, another role ambiguity is hurting the ecosystem. Under the new bankruptcy law, any operational creditor may initiate a “resolution process”, which, at the threshold, suspends the powers of the debtor’s entire board of directors, and imposes a moratorium on recovery of any dues from the debtor.  The abuse of this provision has begun in earnest. Instead of servicing the financial creditors whose firefighting needs the system’s support, the enforcement system is being clogged with anyone claiming Rs 1 lakh or more being able to hold all the financial creditors to ransom, to extract a settlement by threatening a snowballing effect of a moratorium. The pain of having the moratorium presents a perverse incentive to small operational creditors who can derail the financial creditors’ engagement with complex decisions, which can involve weighing recovery, enforcement, revival strategies and exit planning, all at once. Clearly, overzealous knee-jerk policy is only going to cause more problems, far from solving existing problems.


This Without Contempt column was published in the editions of Business Standard on July 13, 2017

Keep official abuse of governance in check

Last week, India’s media was abuzz with reports of a meeting that did not take place — the one between officials of the Ministry of Finance and members of the Monetary Policy Committee (MPC) of the (RBI). Around the same time, the sacked chief of the United States’ Federal Bureau of Investigation deposed with candour about his interactions with US President Donald Trump, in the midst of a probe into whether the latter had obstructed justice.


Both the events point to one question: What level of intervention by the “government” is acceptable in the functioning of governmental institutions that have their own institutional governance mechanisms? For many, the point of discussion itself is meaningless: To their minds, once an institution is “governmental”, the government in office has every right to dictate terms on how to “govern”. If you believe in that approach, feel free to stop reading further. If not, remember this is an issue even more critical for India than for the United States. Here’s why.


Most Indian economic legislation — the Acts that led to setting up regulators for the capital markets, insurance sector, pension funds or telecommunications and airports, and so on — have specific provisions that enable the central government to issue directions on matters of policy to regulators. If more than one view is possible on what constitutes “policy”, the government’s view is final. For many policy wonks, such a legal position is adequate for the government to have an unconditional say in the running of a regulatory or investigative institution.


Indeed, when controversy over interference erupts, government servants usually point to these provisions. Worse, potentially diabolically, it is usually pointed out that in fact government records have no evidence of these provisions being actually put to use. Indeed, there is even a reluctance to use these powers formally. For example, when the finance ministry could have issued policy directions to the regulators of the capital markets and the insurance sector to resolve their differences over how to regulate unit-linked insurance plans that appeared to have features of both insurance policies and mutual funds, the finance ministry instead asked the regulators to litigate. Formal use of the policy-direction power requires taking a stance in writing and exposing the decision to accountability in the form of judicial and academic review. Informally, the clubby-chummy world of “moral suasion” enables unbridled intervention and “guidance” with no statutory accountability involved.


This is the context in which traditional central bankers were chafing at the very mention of the idea of setting up a MPC — where nominees of the finance ministry would engage in discussion with central bankers — although the central bank would have the last word thanks to a casting vote of the governor. The finance ministry’s thinking in wanting to meet the committee members points to the central problem with governance in India, whether it is corporate governance or statutory governance. When a governance system entails representation in the form of people trusted by the nominating authority being appointed to a forum, it would not follow that the nominee is a postman or a spokesman at the forum for the nominating authority. She is not meant to be a messenger or agent, who is to carry out instructions of the nominating authority.


For example, once a director is nominated by a shareholder to the board of directors of a company, the director has to play her statutory role in the governance of the company. If the fact that she is a shareholder-nominee were to be a licence for the nominating shareholder to dictate terms to her and to the board where she sits on how business must be conducted, not only the very office of the director but also the entire forum of governance, that is, the board of directors, stands eroded. They would be rendered as rubber stamps in reality and office-bearers only on paper.


It would be akin to the mob’s view in “people’s rule” (yes, that sounds Maoist) prevailing over the rule by those voted to power, because it is the people who voted them to power and the mob belongs to the people. It is this principle that led the United Kingdom’s Supreme Court’s ruling in the Brexit case, too. It was for Parliament to take a decision and pass a law on leaving the European Union and not say that it had no role on the premise that the people had spoken through a referendum. Identical is the case with a gay marriage plebiscite in Australia, where wary of popular reaction either way, members of parliament sought to wash their hands of the matter and sit on the fence by referring the question to a plebiscite.


Instituting the MPC with governmental representation does not mean the government can tell the committee what it must do. Having chosen them, it is for committee members to function and take independent decisions of their own volition. Indeed, there is one very important element in all this: Such a nuanced governance narrative could push underground, the influencing of the committee members by the government.  Instead of openly seeking meetings, these discussions would be pushed to the sidelines of think-tank discussions, the cocktail circuit and the drawing rooms of those influential in the lobby.


However, the potential abuse of rightful conduct of governance does not mean that right governance systems should themselves get shunned. It is for transparency systems such as the law on right to information, or parliamentary oversight (indeed that is what led to the deposition in the United States) to keep in check abusive underground activity in governing a nation.


This column was published in the Business Standard’s edition dated June 15, 2017 under the title Without Contempt