C Rangarajan, Former RBI Governor is of the view that while recapitalising the public sector banks there are two sets of issues that need to be addressed. One, looking at the number of banks and the way in which the public sector undertaking (PSU) banks should be managed.
According to him, the most important thing to focus on is the organizational structure of banks.
He is of the view that structural reforms should come first before merger and acquisitions but there is no need to rule out mergers.
Within the structural reforms, he thinks management of the banks is the most crucial reform. The relationship between government and banks need to be clearly spelt out.
Reforming the way the banks are being run is extremely important, says Rangarajan.
Below is the verbatim transcript of the interview.
Q: Finance Minister has clearly said that recapitalisation will come with reform. According to you what should be the one-two things that should definitely be part of reform while recapitalising public sector banks?
A: In a sense that the public sector banks have run into these problems because of the failure to confirm to certain standards or prescriptions. Therefore, if we are trying to bailout or if we are trying to help the commercial banks then this help should go hand in hand with what we consider to be the most important things that can be done to prevent such crisis from happening again.
Therefore, one of the important things that we needed to focus on is what do we do about the organisational structure of the banks. The way in which we look at the public sector banks and how many should be there and how many should be merged with others and then of course there is an overall question about how are the public sector banks managed. I think these are two sets of issues, which we should address. One looking at the number of banks, second looking at the way in which the public sector banks should be managed.
Q: Which should be first at this juncture because we have a large number of banks where the non-performing asset (NPA) percentage is above 10 percent. There are only a few which are even below 10 percent and even they are above 5 percent in terms of NPA as a percentage of total loans. At such a time can we wait for mergers for reform or should it be structural reform first and then mergers?
A: I would say structural reform first because I believe that even the merging would be a difficult task unless we have undertaken some reforms which are of fundamental nature. Actually merger and acquisitions are common features; even in a well organised banking system it happens whenever one institution feels a need to merger or an institution feels a need to acquire. Therefore, that can happen in a normal course but in our situation the normal course essentially means that the government also taking the initiative but I think structural reforms which are needed, must be undertaken first before merging but it need not rule out mergers at all. If there are some institutions which feel the need and so on, let them do it. But any major reorganisation of the banking system itself in terms of the number, size and all that can wait till we have resolved the NPA issue and also resolved how banks will be managed.
Q: What do you mean by structural reform first? What should be the most crucial reform?
A: I think the management of the banks is a critical issue. I think even though certain things were laid out earlier saying that we will reform the banks and so on. Nothing has happened. I mean even now one hears about delay in the appointment of Chairman or the Managing Director; sometimes the banks are without the head for quite a long time.
Q: Even if they are appointed in time. Is that reform enough?
A: That is not enough. I am saying that the relationship between the government and the bank must be clearly spelt out. Then there are other issues which are not so fundamental but also how much time should we give to the bank Chairman as tenure. Is there a minimum tenure? There have been incidences and cases of people having had only one year or even less than one year. It was said at one time in terms of the criteria there will be some cut-off in terms of age but it was followed in one year and so and from next year it was given up. Therefore the reform of the way in which the banks have been run, is extremely important.
Q: So tenure is one. What would be the other? Would you say that government's stake should come down just below 50 percent to 49 percent so that they can recruit laterally? Right now, I mean State Bank of India's (SBI) former Chairman was bemoaning; she couldn't even go to the universities and recruit fresh people from management schools. So if you are brought under 50 then you do not have these problems also you do not have the investigative agencies, the Central Vigilance Commission (CVC) constantly asking for reports. Is that a part of your reform plan at all?
A: I think I will view the problem slightly differently. Yes, the facts that you presented constitute one angle to the approach of this problem. The other is somewhat related to the number of banks that the system should have. Basically one can see that so long as the government has to have 51 percent then the extent to which the capitalisation of that bank can expand. It depends upon the ability of the fisc to contribute to that. I think leaving aside ideology, purely from the point of view of the ability of the fisc to capitalise all these bank adequately we should move away from not having all the banks, keep some banks, others to let it go below 51 percent and contribute whatever capital that you can do. I think that is one thing but that is purely pragmatic way of looking at the problem.
The other is that the 51 percent rule does not necessarily mean that we have to do things in the way which we are now doing. The argument about the placement of people or recruitment of people is not bound by this.
Q: It's a court order. The court said that since you are part of the government you have to recruit only through national examinations that...
A: I think we need to take it to a higher level of authority and say that you should give us a freedom to be able to manage our affairs. It cannot be that everything should be followed in a particular way.
Q: But even the investigative agency says the same thing. Once you are 51 percent government, you are government and therefore you come under the Comptroller and Auditor General (CAG), you come under the CVC.A: I think the way CAG, CVC and others look at the problem will also have to change. The tail should not wag the dog.