Heed Rajan's advice to save India's banks

The deep distress that India’s banking system is mired in can’t be stressed enough and the government will do well to take seriously the suggestions by former RBI governor Raghuram Rajan. He had suggested to the then UPA government and the PMO that banks be distanced from the government and professionalised. Interestingly, Prime Minister Narendra Modi had said on taking over in 2014 that the days of banks getting phone calls from New Delhi would be over. If this has actually happened, it’s a good thing. If not, as is more likely, Mr Modi should look into it.

What’s intriguing is that Mr Rajan gave the PMO a list of fraudsters and suggested that if one or two of them were punished, it would send a strong message to others. But Mr Modi failed to act on this, and such inaction by a Prime Minister who came to power on the plank of anti-corruption seems inexplicable. It adds muscle to the “suit-boot sarkar” accusation by Congress leader Rahul Gandhi.

It’s truly a matter of concern that one-third of 21 PSU banks are headless because the panel headed by the Prime Minister is yet to clear CEO appointments. Also, three of them don’t have a chief executive for the past seven months. The only conclusion is that banks are still tied to the government’s apron strings.

The government is yet to relinquish control by bringing down its majority stake in several PSU banks as recommended by the P.J. Nayak Committee, which was appointed by the RBI to improve corporate governance in banks. The government, however, must be credited for constituting the Banks’ Board Bureau, which was to recommend the selection of chiefs for banks and financial institutions. This body had in 2016 recommended the names of 14 candidates to the Centre, but the Appointment Committee of Cabinet, headed by the Prime Minister, is yet to take a call. This is a sad state of affairs as it defeats the purpose of appointing such a board.

Public sector banks are saddled with losses of Rs 79,000 crores and bad loans for just 2017-18 amount to Rs 8.6 lakh crores. The magnitude of the loss due to bad loans can be imagined as it’s equal to one-third of the nation’s annual budget of Rs 24.4 lakh crores, while PSBs losses are equivalent to the agriculture budget, which is Rs 58,000 crores. The PSBs also lost Rs 25,775 crores due to frauds. If one goes by the recent Punjab National Bank case, where diamantaire Nirav Modi and his uncle Mehul Choksi cheated it of Rs 13,000 crores, it was evident they could do this with the help of low-level bank insiders.

If banks were professionalised, perhaps these frauds would not take place or at least they would be marginal as professionals are more vigilant and would be held accountable.

H10