Just a day after the Banks Board Bureau hit out at the government, the head of the panel, Vinod Rai broke his silence. Vinod Rai, the co-editor of an upcoming book titled 'Seven Decades of Independent India' spoke exclusively to CNBC-TV18's Ronojoy Banerjee on the state of India's public sector banks.
Below is the verbatim transcript of Vinod Rai’s interview.
Q: Institutions clearly seems to be one running threat that I have found different authors exploring in different ways. The opening chapter that both of you have together written, you have said that providing effective governance and building efficient institutions were some of the major public policy challenges as India became a sovereign republic, many would say in the last 70 years, we have managed to create robust effective institutions but many of them are now beginning to show signs of decay, we have a dysfunctional parliament, there are questions being raised about the judiciary, many of the questions are being raised within the judiciary, leading investigation agencies are being seen as listening to their political masters so to speak, are our institutions showing signs of decay?
Rai: That is exactly the sign of a robust, healthy, vibrant democracy where you are able to question the institutions. The issues are these. Institutions take a period of time to mature and then get sufficiently empowered to be able to deliver on the track that they are expected to deliver.
What happens in these institutions, you have seen the Election Commission (EC) performed to the team whenever the issue required, the EC would step in and if political parties are scared of anything or cautious about anything, it is not so much the court or anybody else but it is election commission.
Similarly, the Supreme Court (SC) when things they found were going slightly out of the way, SC would come and set down the parallel lines between the institutions. So at the point when it is required these institutions had delivered. Yes, there are questions that you are raising, there are people in public who want to ask questions to them and I think it is a very good sign because in the last decade, what has happened is that the citizens have come centre stage. He is seeking transparency, he is seeking accountability and that is why he is questioning.
Q: One area where not enough liberalisation or reforms may have taken place is something which you have highlighted also is in the banking sphere you have spoken that many of the state-run banks are in their own crisis of existence and you were speaking of course in the context of non-performing assets (NPAs), interestingly you have said that there has been political reluctance for decades to reform banks, why the political reluctance and what kind of reforms are you talking about because many would say there have been some kind of reforms that we have seen in the recent past, so what is it specifically that you have in mind?
A: The first reform is - why I talked about reluctance is 50 years a public sector banking we have done after the first nationalisation of the bank. It is a mind-set, which has been created over 50 year period. It is not overnight that you can change that mind-set.
Mind-set changes take a longer period of time than systemic changes, structural changes. These can come about faster but once you change your mind-set, it takes long to go back. So in this particular case, it is a question of a mind-set change.
We believe that only public sector banks can deliver. Yes, they have delivered there is no doubt about that. In fact, I believe that the infrastructure that has been created in this country, roads, rail roads, ports, airports, power houses, telecom etc because public sector banks have lent to these sectors but the issue is public sector banks also must be nimble footed, they will have to change with times. Systems have changed, models of governance and lending have changed, IT platforms have come in to force, we have to remain nimble-footed and that is where we talk about the elephant learning to dance. So it will have to change when the government has not made its intention known by saying that in the IDBI Bank, they will drawdown equity below 50 percent. So that is the harbinger of change that we are talking about.
Q: Considering the fact that you have said that how 2014 politically marked a watershed year which was after 30 years, one single party have the kind of majority that it did, you mentioned demonetisation, GST and some of the reforms that they have carried out, in that context are you a bit disappointed that not enough has been done with banking, yes they have announced insolvency and bankruptcy code (IBC), they have announced, bank recapitalisation plan but still when it came to privatisation, the government now said that is not the plan, we will instead opt for consolidation which many are wondering is that even something novel.
A: That is why I said call the mind-set change. You cannot change these things overnight. What are you doing when you are changing the models of governance in public sector banks or privatising public sector banks? You are playing with the money of people. You cannot afford to make a mistake. You cannot afford to have people lose trust in their banks. So anything that you do, has to be time tested, has to be cautious, has to be prudential then you have to ensure that it will deliver for the purpose of what your objected is. That is why I wouldn’t want the reforms to be overnight. What I would say is – you are talking about consolidation, fine, there are models of consolidation. Do you merge two large banks and create a larger entity or do you merge a small bank with a large bank to kill the smaller bank? There are two-three models that we have.
Q: What are you leaning more towards, more consolidation or more privatisation since you bring up Indira Gandhi 1969 and how in one stroke 14 banks were nationalised hence I am asking you what are you leaning more towards?
A: Consolidation is something which is a must which will have to come about, there are no two ways about it. You cannot have 24 banks owned by government and with government providing them the capital every other day to improve their technology, improve their credit, appraisal systems, improve the HR systems etc, so consolidation will have to come about, it is inevitability, it has to come about.
The other thing you talked about privatisation, yes, over a period of time, government will have to draw down its equity otherwise what will happen is whether it is 51 percent or it is 26 percent, the difference is very minimal because banks require capital to grow, capital is required in the country to build among other things infrastructural things – estimate is about Rs 15 lakh crore we will require. Rs 1.5 trillion will be required. That kind of lending the banks cannot do with a capital that the government can provide, their capital adequacy. So some point of time, we will have to draw down on capital or equity of the government.
But it will be a process, it will take a while. Today with the kind of capital and I think government announcing Rs 2.11 lakh crore is a substantial amount that they have announced. For the next two-three years, they can take care of it.
Q: Should the north block pullback from the affairs of public sector banks? That is something you have hinted at but I want to ask you most specifically, is that something that one should seriously talk about?
A: I think government has made its intent very clear in this. In constituting the bank’s board bureau, in the PJ Nayak committee report that you read, the BBB is a first step to creating a holding company to which the government will transfer its stakes and the holding company will be a professionally run holding company, it will run the banks. So government– in principal has taken a decision to distance itself. The issue is how long it will take.
Q: It has been over two years since this institution BBB came into being and you have recently talked about that there was a sense of frustration I would imagine that many of the recommendations you made were not acceptable.
A: No, it is not the frustration. What happens is – recommendations can work in ideal kind of a situation, not when you have the kind of problems which are coming up out of the NPA system every other day. Banks had to go through the demonetisation, through the GST where they had to align themselves to GST set up and now every other day we have a problem in terms of the NPAs. The systems can work, recommendations can work only after the clean-up is taken place.
Q: First clean up.
A: Otherwise what will happen is you are just allowing the disease to go and infect the new systems that you will create. So the thing is that you have to take the call, clean up, cut your losses and then reform. And when you reform, you reform in a system which is totally new where your systems are new but more importantly where the human resources are the new systems who know how to operate that new structure.
Q: I want to end that conversation with you, because there have been specifically about the BBB and functioning and since that becomes very important, the conversation about addressing some of the underlying issues with respect to the banking sector recently over the last few days, different quotations have been attributed to you with respect to your proposed meeting with the Finance Minister, did it happen, did it not happen. Now you have clarified saying you have met him several times. One is a bit puzzled by the different quotes being attributed to you?
A: This is nothing to do with what is written in the book but what has been brought out in the media is a letter, which I wrote about nine months back and then after that the finance minister has said so have I said and media has conversed with the minister any number of times on various issues. So in a sixty page, compendium, if you pick up one sentence that doesn’t constitute entire set of recommendation, so there needs to be no confusion about it. It is question of a process but nobody can expect – either the government, the DFS or the BBB to deliver in two years’ time. As I said first that something which is 50 years old, you cannot overturn it and do it. If you do it in a hurry, it doesn’t go, the reform is not sustainable. If you do it slowly, think over it, it becomes sustainable and that is what we are aiming at.
Q: When you talk about great institutions, RBI has always been one of the shining examples of that. So to open a bank account 24 hours-72 hours but when it comes to syphoning or running away with funds it's perhaps a matter of minutes. Do you feel somewhere, when you are looking back with your vast experience, RBI is now at that critical moment and how it responds to this crisis, will perhaps determine how people view this institution? Where does RBI stand today?
A: If you look at the most developed system today, when I am talking of most developed system I am talking of monetary authorities or central banking system. At a click of a button on the mouse, millions have been transferred out of geographies. In 1997 the so-called Asian Tigers folded up. Our RBI, our central bank stood its ground and supported. Nothing happened. When the financial meltdown to place globally; US, Europe, much stronger institutions, much well better regulated. RBI did stand its ground and Indian financial systems were isolated from it.
On the basis of one scam or two scams you cannot fault a regulatory system or regulatory institutions and I will tell you why, the well-structured systems will fail if humans operating them collude, isn't it. That's exactly what happened in US and that's exactly what happened in Europe. It's a man behind the machine which ultimately matters and if you and I collude then the best system structure that is created is not going to function and that's exactly what has happened in this.
Q: Do you empathize with Urjit Patel when he says RBI needs more powers to tackle issues like this?
A: It's not a question of empathy or thing. RBI today is sufficiently well architecture to be able to take care of any of these problems. What you require is a meeting of the minds of the financial authority and the monetary authority to be able to provide the reforms.
Q: Architecturally RBI is well in doubt but from regulatory standpoint, I do not know whether it means the same thing or not….
A: From a regulatory standpoint he has all the powers. What he said was I should have the power to dismiss a CEO.
Q: That is where my earlier question sir, about the powers of the department of financial services comes.
A: Today the appointing authority is the government and even when the holding company comes to be, RBI will not have the dismissing or the appointing authority. So the monetary authority in no country has the power to dismiss. They can recommend a dismissal which they have done and dismissals have taken place in government based on the recommendation of the RBI.
Q: I want to talk about the other bid elephant in the room which is civil service and public servants and you have been candid about how public servants have been resistant to change. Many of these administrative reports have been gathering dust. If public servants themselves are not willing to change from within is now the onus on the elected officials to put pressure on them to bring above that internal reform?
A: Seventy years of this elephant, it has a mind-set and the mind-set was regulatory mind-set. We are wanting that elephant to switch to a developmental facilitation mind-set. It will change and I can see the change. If you talk to people who are of 40-45 years and that age, you can see the change in them, you can see the change in their thinking and they are more attuned to facilitation than they are of regulation. Yes, 55 years plus you may not. So times have come when the mind-set is changing. I don't expect it to change in next two years but the very fact that India could jump from 130th position to 100th position in the ease of doing business says a lot but we need to go 70 notches up at least. It just shows that the change is coming. I think it is unfair for us to expect that the change will come about in three years' time. It will come about definitely because all indications are in that direction. It's only a question of two-three years more.
Q: Why that issue also become relevant is also because over the relationship between the elected officials and the bureaucracy in the recent past we have seen the Aam Aadmi Party and the fight that they are having with the chief secretary, you have come under some vicious attack by the Congress because of your role as CAG, how does one tackle these things and what do these incidents tell us about the road ahead?
A: It means nothing. These are all signs of a vibrant democracy where everybody is questioning everybody else and that is what I said when I said that the common man has come to a centre stage today. He will want accountability from you. So if a political party is questioning the bureaucracy or the bureaucracy is questioning the political party, it is good. There is healthy tension.
What happens is - initially there will be some negative energy coming out of it but soon it coalesces into a cohesive hole and it will start functioning because both the parties involved realised that the step forward for both of them vis-à-vis the public will be to ensure that they show synergies.
Q: You have given me the big picture but what about the civil servants who caught in the middle of it? Like for instance, in your case when there are acquisitions being made against you that you were the political tool of BJP how do you then get a personal level, at a big macro level eventually things will get evened out but at a personal level, how does one deal with it and what would your message be to some of the other aspiring civil servants who may have seen the episode and would have found it rather disheartening?
A: Did it matter to me? In what way has it changed me?
A: There was a road ahead. You have to be sure about one thing that you don’t have an Achilles’ Heel. You don’t have a skeleton in your cupboard and if you are robust on facts, you are sure about what you are going to be putting out into public domain, there is nothing to worry. If you throw some stone at somebody, he is going to retaliate. We were aware of that.
Q: You stand by whatever decisions you have taken in the past?
A: In the past and not only so, I have seen green shoots all over the country where people are able to stand up and say, don’t give me an illegal order. You want to give me an order, give it to me in writing. In a parliamentary democracy, the political executive is always supreme. He has to give instructions to the administrative executor in that sense because he is accountable to the people but that instruction has to be within the confines of legality and propriety. If it is other than that, bureaucrat is saying, please give it to me in writing.
So I think good things are coming about and I can see those green shoots all over the country.
Q: Then this – maybe you could go first – maybe with a personal anecdote of looking back at your illustrious career, was it at all difficult the last few months especially because civil servants are said to be impervious, immune from political push and pull but suddenly you have became a political figure in that sense, how has it been – end this giving me a sort of a personal anecdote, how have you dealt with the CBI court order or whatever?
A: I believed in doing what I was mandated to and doing it perfectly well. I believed in doing it in the sense that accountability to myself – I was absolutely clear, my conscience was clear about it. I stood by it. I knew that the moment you are picking on people, they are going to be picking back on you. I stood my ground, nothing much happened, things came into public domain and time tested methods were evolved, I don’t think it has changed me in any way and I don’t think it has lessened the stature of the institutions also in anyway.
Q: Your message to young civil servants?
A: Stand by your own conscience, you will deliver.