Reserve Bank of India (RBI) governor Raghuram Rajan said on Tuesday that too many regulators do not augur well for the banking sector and called for greater autonomy for public sector bank boards.
"Today, a variety of authorities â€“ Parliament, the Department of Financial Services, the Bank Board Bureau, the board of the bank, the vigilance authorities, and of course various regulators and supervisors including the RBI â€“ monitor the performance of the public sector banks. With so many overlapping constituencies to satisfy, it is a wonder that bank management has time to devote to the management of the bank," he said in his inaugural address at the two-day FICCI-IBA Annual Global Banking Conference.
"It is important that we streamline and reduce the overlaps between the jurisdictions of the authorities, and specify clear triggers or situations where one authority's oversight is invoked."
Rajan made a case for restricted, specific intervention by oversight institutions like the CVC and the CAG with regard to public sector banks.
"Given strong oversight from the bank's board, the CVC and CAG would get involved only in extraordinary situations, where there is evidence of malfeasance, and not when legitimate business judgement has gone wrong," he said.
Here are the highlights of Rajan's speech at the conference:
On review of bad loans
"The most important issue on the minds of bankers, given the results season, is the Asset Quality Review initiated in early 2015-16. It has improved recognition of NPAs and provisioning in banks enormously, and many of you have fully imbibed the spirit of the review. Some banks have taken significant steps in recognizing incipient stress early."
"Now focus should move more to improving the operational efficiency of stressed assets, and creating the right capital structure so that all stakeholders can benefit. This implies simultaneous action on two fronts.
"Where necessary, new project management teams have to be brought in, sometimes as owners, and where this is not possible, as managers. A creative search for new management teams, including the possible use of public sector firms or private sector agents, is necessary, as are well-structured performance incentives for non-owner teams such as bonuses for meeting cash flow/profit benchmarks and stock options. Of course, if the existing promoters are capable and reliable they should be retained.
"Equally important, the capital structure should be tailored to what is reasonable, given the project's situation. If the loan is already an NPA, there is no limit to the kind of restructuring that is possible. If it is standard, but the project is struggling, we have a variety of schemes by which a more sensible capital structure can be crafted for the project.
"These schemes include the 5/25, the SDR, and the S4A. A caveat is in order, though. Some of the current difficulties with stressed loans come from an unrealistic application by banks of a scheme so as to prevent a loan turning NPA, rather than because of a carefully analyzed bank effort to effect management or capital structure change."
The grand bargain
"Banks in India have been subject to the grand bargain, whereby they get the benefits of raising low cost insured deposits, liquidity support and close regulation by the central bank (I am sure some of you see this as a cost) in return for maintaining reserves with the central bank, holding government bonds to meet SLR requirements, and lending to the priority sector."
Challenges faced by public sector banks
"The most pressing task for public sector banks is to clean up their balance sheets, a process which is well under way and which I discussed earlier. A parallel task is to improve their governance and management. Equally important is to fill out the ranks of middle management that have been thinned out by retirements, and to recruit talent with expertise in project evaluation, risk management, and IT, including cyber security.
"Over time, as the bank boards are professionalized, executive appointment decisions should devolve from the Bank Board Bureau (BBB) to the boards themselves, while the BBB â€“ as it transforms into the Bank Investment Company (BIC), the custodian for the Government's stake in banks -- should focus only on appointing directors to represent the government stake on the bank boards. It is important that bank boards be freed to determine their strategies."
Talent acquisition and retention at PSBs
"The middle management ranks of public sector banks are being thinned by retirements. In addition, they need experts in specific areas like project evaluation and risk management. At the same time, banks have to reduce bloated cost structures.
"...to get talent in specialized areas like project evaluation, risk management, and IT, they may have to hire laterally in small doses. While contractual hires are currently permitted, better personnel would be attracted only by a strong prospect of career progression internally. Banks will have to think about how to enable this.
"One of the difficulties public sector banks have is court judgements that prohibit hiring from specific campuses. This leads to anomalies like the public-sector-bank-supported National Institute of Bank Management sending most of its high quality graduates to work for private sector banks. Public sector banks can petition the courts to allow some modicum of campus hire, especially when the campus chooses openly through a national exam. Another alternative is to make bank entrance exams much less onerous to take, with applications, tests, and results, wherever possible, available quickly and online. The banks then have an easier task of persuading students on elite campuses to take the exam. We are following this latter course at the RBI."