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Distance Public Sector Banks from Government: Raghuram Rajan
May 22, 2014

RBI Governor Raghuram Rajan made a strong pitch for nationalized banks distancing themselves from the government through a holding company as recommended by the P.J.  Nayak committee. The governor has also suggested that the post office could be given a payments bank licence where it will open accounts but deploy money only in government bonds.

The public sector banks (PSBs) are under threat as new technology will soon deprive them of cheap deposits, which have been their mainstay. Also, on the lending side, PSU banks will find that their safest corporate customers are raising money directly from the markets, leaving the banks with only infrastructure and retail lending.

RBI is working on new regulations that would provide flexibility to banks on priority sector lending. The flexibility would enable banks with surplus priority sector loans in any one segment to sell that to another bank, which was short on its targets. However, he said that public sector banks need to distance themselves from government influence to become more competitive.

In the past, PSBs had the best talent. But today, past hiring freezes have decimated their middle-management ranks, and private banks have also poached talented personnel from PSBs. PSBs need to be able to recruit laterally, but to do so they need to be able to promise employees responsibility as well as the freedom of action. Unfortunately, employee actions in public sector banks are constrained by government rules and second-guessed by vigilance authorities, even while pay is limited. It will be hard for public sector banks to compete for talent.

Making a case for implementation of the Nayak Committee recommendations, Raghuram Rajan said, "A number of eminently practicable suggestions have been made to reform PSBs, such as creating a holding company to hold government PSB shares, increasing the length of PSB CEO tenures, breaking up the position of chairman and CEO, bringing more independent professionals on bank boards and empowering boards with the task of selecting the CEO, and becoming more selective in cases that are followed up for vigilance investigations.

If the committee's recommendations are adopted, competition will improve efficiency. If public sector banks become competitive, and especially if they do so by distancing themselves from the influence of the government without sacrificing their public character, they will be able to raise money much more easily from the markets. Indeed, the better performers will be able to raise more, unlike the current situation where the not so good performers have a greater call on the public purse.

 


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