Gist of The Hindu: August 2015

Gist of The Hindu: August 2015

Get real with public sector banks

The Narendra Modi government wants a comprehensive overhaul of public sector banks (PSBs), which account for more than 70 per cent of assets in India’s troubled banking sector. It’s hard to quarrel with the idea: what could be more attractive than a revamped and shining public sector? It is important, however, to focus on what can be achieved quickly. The government must do what it takes to revive bank lending and private investment at the earliest rather than pursue ‘reforms’ that would keep PSBs in limbo for an extended period. There are three sets of issues in PSBs: governance, management and operational issues. The key governance issues concern the composition and functioning of the board. The important management issue is the selection of the CEO. The operational issues are the resolution of non-performing assets (NPAs) and the infusion of capital in banks. It’s useful to take stock of where we are and where the government intends to go.

The government is moving in the direction suggested by the P.J. Nayak committee’s May 2014 report on bank governance. For starters, it has decided to separate the roles of the chairman and managing director (CMD) in all PSBs except the State Bank of India. Bank chairmen will be selected by a panel headed by the Reserve Bank of India Governor. The case for separation of roles — that there was too much concentration of powers in the hands of the CMD — is not very persuasive. Bank boards have one representative each of the government as well as the RBI. They also have two or more executive directors as well as representatives of both officers and workers of the bank. It is not true that the CMD could act as he or she liked. The Nayak committee had wanted the roles to be separated at the end of a three-phase period. The committee reckoned that PSBs by then would have acquired substantial autonomy, and that the power to appoint chairmen, independent directors and the CEO would have devolved fully to the boards. The government has chosen to separate the two roles at the very beginning. There are two dangers in doing so.

First, however distinguished the panel that will select the chairman, it is always possible for the government to influence the chairman once he or she is appointed. The result would be to pit a political appointee against the CEO who has to deliver results. Second, the chairman may have his or her own agenda; this would render the CEO ineffective. It would have been better to defer the separation of roles until PSB boards had begun to function effectively with independent directors. Further, the Nayak committee contended that private banks did better when it came to having independent directors. This contention must be strongly refuted. Directors on the boards of private banks are chosen by the promoter or management and are therefore hardly independent of either. If anything, the PSBs are a little better off: a government-appointed independent director is not beholden to the CEO for his appointment and hence can act independently of the CEO.

There is an unresolved issue of governance in India: can a director appointed by the dominant shareholder — whether government or a private owner or management — be said to be truly independent? As this issue is not likely to be addressed in a hurry, the best we can do until then is ensure that independent directors have the credentials to add value to the board. The government proposes to achieve this by setting up a Bank Boards Bureau (BBB) as recommended by the Nayak committee. The BBB will select CEOs, independent directors and bank chairmen. It will consist of three former bankers, two eminent professionals and the Secretary of the Department of Financial Services.

Next, the management issue. A professional body to select CEOs for PSBs is by no means a novel idea. In the past, we had an Appointments Board which was headed by the RBI governor and included eminent professionals and a Finance Ministry official. Yet, this distinguished body was not able to get appointments of bank CEOs right. The political will to let the Board do its job was absent. It was the Finance Ministry that decided the appointments. The BBB’s outcomes cannot be very different unless the government is willing to let it function independently. And if the government is willing to let go, why not stay with the Appointments Board? If the government can entrust the selection of bank chairmen to a panel headed by the RBI governor, why not do the same for CEOs and independent directors?

Finally, the operational issues in PSBs need to be quickly resolved. The issue of stalled projects is being addressed. Lenders will have to write down some of their loans and promoters have to take a hit with bank loans getting converted into equity. At the same time, the government must infuse more capital into PSBs. This is one area in which banking policy has disappointed the most. PSBs cannot be expected to perform unless they are given the necessary capital. They need about Rs. 20,000 crore by way of government equity every year for the next five years. In 2014-15, the new government promised Rs. 11,200 crore and ended up infusing Rs. 6,990 crore in nine PSBs. In 2015-16, it proposes to provide Rs. 7,940 crore. Who so? Because the government wants underperforming banks to improve their performance first before asking for more capital. Such an approach is seriously flawed. Improvement in performance will follow infusion of capital; it cannot precede the latter. That, after all, was the logic behind the bailout of banks that failed in the sub-prime crisis. The government can bring out a sea change in PSBs by doing just three things: appointing the right CEOs, backing them with the requisite capital and bringing independent directors of competence and stature on board. These can be done expeditiously with the existing mechanisms and the existing talent in PSBs. It is more important right now to secure quick outcomes in banking than to pursue some grand design.

Caution and optimism

In the last two decades, the diplomatic emphasis in India-China relations has been on working on a strong economic relationship that would whittle down the strategic differences and feeling of adversarial relations that have piled up over time. The three-day visit to China by Prime Minister Narendra Modi stayed true to that script, but clearly built on the bonhomie generated during Chinese President Xi Jinping’s India visit in September 2014. If the emphasis during that visit was on building a “closer developmental partnership”, the reciprocal visit by Mr. Modi has been all about enhancing that relationship, mostly relating to trade and economics. This is evident in the joint statement issued after bilateral talks between Mr. Modi and Chinese Premier Li Keqiang. The statement also seeks to address some of the concerns over the nature of the economic relationship. The magnitude of two-way trade has risen to $71 billion, but there has been a corresponding rise in the trade deficit. The statement suggests that both countries are cognisant of this deficit and are taking steps to address this, over and above those decided during Mr. Xi’s visit. The signing of 26 agreements detailing commercial investments worth $22 billion between companies also signifies the growing economic ties. The joint statement on climate change that reiterated the principles of “equity and common but differentiated responsibilities” to address issues of climate change and reiterated support for the UNFCCC and its Kyoto Protocol, was also timely. This would clear some doubts about China’s position following its joint communiqué with the U.S. on cuts in emission levels.

That said, the strategic distance remains: the joint statement and also Mr. Modi’s remarks during the visit recognise this fact. The boundary dispute finds mention in the joint statement; while progress in talks has been glacial ever since they began, there is the assurance that both sides will seek to maintain peace at the border as they work towards a solution. Mr. Modi’s delegation gave no indication that India is keen to participate in China’s ambitious “one belt, one road” initiative; the joint statement limited the reference to cooperation on the Bangladesh-China-India-Myanmar economic corridor. This suggests a degree of caution on India’s part over China’s role in India’s near and extended neighbourhood. Yet, Mr. Modi struck all the right notes in his speech engagement at Tsinghua University, suggesting the need to overcome strategic differences even while acknowledging the complexities as India seeks to build concomitant ties with other world powers. It is to be hoped that this emphasis, and ongoing engagement between the two leaderships at the highest levels would build further momentum to truly realise a strong India-China partnership for the 21st century.

Up in the air

The Prasar Bharati Corporation, set up in 1997 by an Act of Parliament with a mandate for public broadcasting services through Doordarshan and All India Radio, to inform, educate and entertain, is today neither fish nor fowl. It is a public service broadcaster only in name; in practice it continues to be the government’s handmaiden. For most of its existence it has faced questions over its relevance in the digital age. There are in the country today over 830 channels accessed by 150 million households that have TV sets. This is a far cry from the time Doordarshan was king and sole purveyor. The virtual government control on the media once ensured that AIR and DD were able to attract the best programmes and producers. The mid-1990s changed all that, and the entertainment channels were followed by private news channels. The Corporation dreamed of being a BBC-lookalike. But that was a tall order. Globally there are over 30 public service broadcasters and the most popular of them is the BBC, to which generations of Indians have been exposed, beginning with radio and later TV. Its level of autonomy and independence has inspired many broadcasters to emulate the model, and Prasar Bharati was no exception. But here is the catch. The BBC, with its much-admired programming, is supported by revenue from licence fee that every TV-owner in the United Kingdom pays. And over 70 per cent of the income is spent on the BBC’s programming.

In sharp contrast, Prasar Bharati runs totally on government funding. Only 15 per cent of the budget is spent on content; the rest goes to pay salaries to its over 31,621 employees. The Sam Pitroda Committee, as other committees before it, wanted the Corporation to become financially independent and to be allowed to monetise its under-utilised assets such as real estate, archival material and the scores of transmitters that have in any case outlived their purpose. All this is easier said than done: the Corporation does not have the authority to give the nod even to open an ATM on its premises. The prospect of autonomy also is seriously in doubt when you look at what it now does with news. Successive governments have taken to managing news content with the next elections in mind or to project governmental achievements. In the latest instance, the BJP government has issued a diktat requiring the news channel to set aside prime time for Ministers to showcase their achievements. In a context where cable TV has penetrated over 92 per cent of the households, unless Prasar Bharati wakes up to the challenge of offering the right kind of programming and technology, the threat to its existence will continue to loom large.

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