HomeEconomy NewsGovernment must give up control of public sector banks, says N Vaghul

Government must give up control of public sector banks, says N Vaghul

On Wednesday, Governor Urjit Patel, in one of his most plain speaking speeches said, "RBI's regulatory powers over public sector banks are weaker than those over private sector banks."

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By CNBCTV18March 15, 2018, 5:52:33 PM IST IST (Published)

For the past two weeks we at CNBC-TV18 have been raising this issue of reimagining PSU banks. On Wednesday, Governor Urjit Patel did just that. In one of his most plain speaking speeches he said, "RBI's regulatory powers over public sector banks are weaker than those over private sector banks." Latha Venkatesh caught up with N Vaghul Founder of ICICI Bank to find what the government should do about the issue.



Below is the verbatim transcript of the interview.

Q: You know that there are these problems of non-performing assets NPAs and one fraud at Punjab National Bank (PNB). It is in this context that the governor Urjit Patel while speaking said that, just to simplify that if such a problem of fraud has risen in a private sector bank he could have removed the board, supersede the board, removed the CEO. But when it comes to public sector banks he cannot remove the board, he cannot remove the managing director, and he cannot supersede the board do you think that is a fair charge that Reserve Bank of India (RBI) doesn’t have enough regulatory powers over public sector banks?

A: On this particular issue, there is no doubt that the mess that has been created today in the banking sector to a large extent owes itself to the fact that the banks have been under public sector for the 50 long years, without any improvement what so ever in their working. Urjit Patel has hit the problem right on its head.

Q: You were there in State Bank of India (SBI), I think were you executive assistant to R K Talwar at the time of nationalisation. Was this the intent that RBI should not have or should have truncated the regulatory powers? Was this the intent of nationalisation of bank, is it that the intent has got corrupted or is the act itself a problem?

A: I attended the first meeting of the public sector banks chairman the day after the nationalisation of the banks. In fact they all assembled in the State Bank’s boardroom and Lakshmi Kant Jha was the governor of the Reserve Bank of India. I was barely 33 at that time and I was sitting as the secretary of the coordination committee. I was taking notes of the meeting. Jha started of his speech with a statement that the nationalisation won’t make any difference what so ever the way in which the banks are functioning. As far as the government is concerned the government will be just like any other shareholder and there will not be dual central power and the commercial banks will have to look to the Reserve Bank of India as the sole regulatory and supervisory authority. Only in matters of the public policy, if the government wants to issue a directive it will issue a directive to Reserve Bank of India and Reserve Bank of India will be the only organisation which the commercial banks will have to look into.

I think in the same breath he said – I don’t whether he said it in the meeting or said separately in a meeting with R K Talwar which I happened to attend that he had been promised that there will not be a department of banking. Because the department of banking will go against the very spirit of the rationalisation of dual control. Precisely the terminology which Urjit Patel has raised now, Jha raised at that particular point of time.

Jha is not the only person who raised this issue. About 10 years earlier in 1959, there was a Mundhra scam. Mundhra scam was investigated by Chagla Commission. Just 24 days to investigate then T. T. Krishnamachari resigned as a finance minister and government appointed a Supreme Court justice by name Vivian Bose. I think I would like to quote if you don’t mind that report – I think it fits in to the present position, he says it is unfortunate that the sensation surrounding the transaction has led public interest towards apportioning individual blame and away from the more important issues regarding the autonomy of public corporations and ministerial responsibility.

The expansion of the public sector in the country is bound to bring to the fore the problem of the firms of corporate ownership like nationalisation. If the dangers of centralisation and concentration of power are to be avoided the efficient working of autonomous corporations established along functional and regional line will assume particular importance.

One more sentence I will add – it is to be hoped when the reports are debated in parliament there will be lesser concern with allocation of blame and more attention will be paid to securing safeguards for a pre-functioning of the autonomous public corporations. This question is of concern to all modern stated which are tending to be leviathan. It is particularly of importance for our country where the politicians have only recently tasted the head of the wine the power and where we have as yet no strong tradition of independent corporate bodies which form the core of pluralistic society.

I think it fits in absolutely to the present situation. To me it is blessing in disguise - this fraud. This should open up their larger issue of government ownership of banks. I think one more important lesion from the past. M. Narasimham was appointed as the chairman of the banking commission in 1991 that is about 27 years back and I happened to be a member of that commission. There was a debate that whether we should privatise the public sector banks and almost all the members were unanimous in their opinion that banks will have to be privatised. But Narasimham wrote out a very interesting piece in that commission report. One is it is not about ownership of the banks that is important. It is their level of control over the government over the banks is important. He said that it doesn’t matter if the government retains the ownership of the banks so long as they assure that they voluntarily abdicate their control functions over the banks in favour of the Reserve Bank of India. I think this is coming in handy today.

Q: How do we bring this to the present scenario, do you think that we could retain the legislative framework but merely abolish the banking department and go ahead or do you think the law needs to change?

A: I would go for a very stronger measure. You may say that I am pretty old and I can take a very radical view of this matter but in 1991, Narasimham did contemplate the idea that the governments control over the banks was no longer justifiable. If the governments control over the banks was no longer justifiable, I don't see any logic for the banking department to continue to function.

I think the Reserve Bank of India should be sole and only authority in order to supervise and regulate the banks. I saw today a statement by Bimal Jalan who said that if public sector banks are privatised, who will lend to agriculture and small scale industries? I think for 50 long years we have been lending and private sector banks are also obligated to lend to the priority sectors which consists of agriculture and small scale industries. So, that is no longer the problem. The problem today is, what Urjit Patel has said, that the duality of control will have to go.

In the PNB fraud, those who perpetrated the fraud, those who facilitated the fraud, those who had knowledge of the fraud, will have to be dealt with. However the larger issue of where does it lead us to, larger issue of the autonomy of the public sector banks, that I think will have to be raised to the fore instead of merely going on debating as to whom should we blame for this? Whether Reserve Bank of India should have known about this and prevented this? Such questions are no longer relevant. We should confine our issue that those who are guilty will have to be punished and how are we going to stop such issues from coming up to the fore in the future.

The only way in which you can stop it, is to give the autonomy to the public sector institutions and have the right people there. The only persons who can decide who are the right people must be the Reserve Bank of India, it can't be a whole lot of people.

Q: How do we set it right? You want a radical change and this law won't do. Urjit Patel makes the same statement, he says public sector banks don't have market discipline, they are not worried that their deposits would be pulled out even if a fraud or a large NPA is created. So, would you say, governments stake has to come down below 50 percent, is that the way out?

A: These two issues will have to be separated. One is the control function and another is the ownership function. I should credit Narasimham for his statement 27 years back that you can segregate these two functions. It does not matter who owns the banks, what matters is who controls the banks.

Today, it is not very clear who controls the banks - is it the central government who is controlling the banks or it is the Reserve Bank of India which is controlling the banks.

27 years back there was no problem whether the government owns or not, today I think it has assumed a further significance. It doesn't make sense for the government to continue to own even 51 percent or 60 percent of the banks because the government needs money for whole lot of other purposes. Why should they continue to hold it? If they are going to give up control, they can as well give up their ownership. So, that means a amendment to the legislation.

Q: As Urjit Patel points out in his speech that because of the Banking Regulations Act Clause 36, the RBI cannot remove board members of the PSU banks, cannot remove the management, the managing director or supersede the board. Is it those clauses that have to first change? How do you ensure that the government has no control functions?

A: The government has to give up that control function. The Reserve Bank of India Act will have to be strengthened. It can go in stages. The first stage is what was suggested by Urjit Patel that you have to amend the Reserve Bank of India Act, vest them with complete powers in order to deal with the public sector banks. He quoted that as in the case of Industrial Development Bank of India (IDBI) if it can be done, why can't you do it for the public sector banks? So, those lacuna can be filled up in the first stage. However within very short time you will have to move to the final stage of the government getting out of the banking system.

Q: Bimal Jalan in this same series last week, his recommendation was that you must have a body like UPSC. India has produced some genuinely autonomous bodies like the UPSC or the CAG or the Election Commission, so have someone like that to appoint board members. Is that a fair mechanism?

A: No. I don't think that we can swim against the current. Banking sector has got an independent regulatory authority - the Reserve Bank of India. You cannot create a parallel authority to the Reserve Bank of India by diluting its powers. This system will not work.

Q: Do you think we have to first fix this control mechanism and only then go for ownership? In this same series, I also spoke with Raghuram Rajan a few days back, of course he thought that we should experiment with bringing down governments stake but he said at the moment the whole governance function is broken. So, if you reduce the government stake now then it becomes a problem as to who is responsible. So, let's first fix governance, would you say that should be the sequencing?

A: You can do one more thing, another possibility - I am just speaking off hand because I haven't applied my mind to that, one way in which you can do it is to transfer the ownership from the government to the Reserve Bank of India.

Q: Sometime back when the RBI still owned 28 percent stake in State Bank of India, they thought that this is anomalous that we own the bank and regulate it and they transferred their ownership to government of India. So, RBI finds its position anomalous if it owns a bank, you think that is an okay situation?

A: Today legislation permits divestment of the public sector banks to the extent of 49 percent, I think you now need to amend it only to say about 100 percent can go to the public. When you talk of privatisation of public sector banks, what do you really mean? You don't mean that you are going to hand it over to an industrial house or somebody who will take control over the banks. What privatisation means is, broad public ownership like what ICICI Bank, HDFC Bank is. No one individual family owns ICICI Bank or HDFC Bank. When I left ICICI Bank our shareholding - public was about 0.5 million shareholders. So, they are ones to whom the banks board is accountable. So, something similar to that will not hurt the interest of the public. Nobody can say that the government has sold their family jewels or family crown to somebody else, they are selling it to the public.

Q: I take your point then that you want government ownership to come below 50 percent rather dramatically as well complete dissociation of the government from appointing any board members or top management in public sector banks. That is the point you are making, right?

A: Let me add one more thing, small issue. So long as the government is holding that control function, the government’s control function theoretically exercised by the department of banking or the finance minister, but still I suppose legally it is appointment committee which appoints everybody. The appointment committee appoints the chairman, the appointment committee appoints the managing director, the appointment committee appoints the board members and look at the bureaucracy that is involved in this whole process that every paper has to be processed, it has to be put up to the appointment’s committee. The appointment committee consist of the prime minister, home minister and the finance minister. I think we can’t afford that luxury of this process to continue. I think we need to device a much better simpler mechanism of identifying the most appropriate people to run the organisation.

Q: I wanted your thoughts even on the other big issue that Urjit Patel raised in his speech about the amount of NPAs in the system-Rs 8.5 lakh crore and still counting and therefore defending the recent RBI circular that if large cases are not resolved in six months they should be send to the NCLT. Your general comment, do you think this is the way to go and the RBI is right in taking that stance, rather severe stance?

A: I fully agree. In fact I have been advocating it for quite a long time. If the default has taken place I think we have to fall in-line with the global practice. There is no reason why India should stand up apart from the global practice in respect of this matter. If a default has taken place and the default persist for some time, I think the only way in which is to take them to the insolvency and bankruptcy code (IBC). We have tried so many measures including Board for Industrial and Financial Reconstruction (BIFR), Securities Act and also the Debts Recovery Tribunals nothing worked. We have to make this work insolvency and bankruptcy code, this is the only way in which it has to go and every defaulter if he cannot – I mean to take care of the default within specified period it has to go to the insolvency and bankruptcy code. Ultimately, the country to me comes first other than the promoter or the banker. Country's interest can be safeguarded.

Q: I just wanted to ask you since you are personally involved in the ArcelorMittal bid for Essar Steel and therefore you are the closer observer for the process you are happy with the way the process has gone? The amendment saying that defaulting promoters ought not to put their hat in, are you happy with the way things have panned out?

A: I am not interested party in the ArcelorMittal, I was director of ArcelorMittal about a year back and today absolutely no interest. I was in the board and I am no longer in the board and so there is no interest involved. To me these issues whether a person is eligible or not eligible will have to be decided by the bankers who are the most appropriate people to decide whether this scheme work, whether they will get their money back and whether the company will be managed by people who are best equipped to run the company.

I am not going to give them any suggestions – to me the letter of the law is not important. The spirit of the law is important. I think the spirit of the law you will have to bring the best person available to come and buy the assets. I take a very much boarder view. The assets that are being created at the ground has to be managed for the best interest of the economy. They have to be productive for the economy. Whoever can make it productive, whoever the lenders feel comfortable they can make it productive they should be brought to the aim. I think you cannot take shelter under one letter here, one clause there which disqualifies people.

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