Steering The PSB Story Towards Viksit Bharat

Public sector banks, or PSBs, are vital pillars of India's economic development, fostering financial intermediation, capital formation, and inclusivity. Their role in providing financial access to underserved sectors and promoting financial inclusion is undeniable. Over the years, PSBs have embarked on substantial corporate governance reforms to enhance their performance, transparency, and accountability. As India progresses towards a Viksit Bharat, continued reforms and strategic interventions are essential to fortify PSBs and harness their potential as catalysts for economic growth and prosperity.

However, as markets evolve and societal needs for financial engagement change, it's imperative to retool PSBs to be modern and competitive entities. Merely being a government-owned bank is no longer sufficient in today's environment. PSBs need to adapt to changing market dynamics, technological advancements, and evolving customer preferences to remain relevant and competitive. Additionally, redefining the role of PSBs to go beyond traditional lending activities and actively support economic growth through strategic investments and partnerships can further solidify their position as key drivers of development in India's financial ecosystem.

Continued reforms are urgently needed to fortify public sector banks and amplify their role in India's economic advancement. Since the 1990s, efforts to transition banking regulation in India from prescriptive to prudential have aimed at bolstering corporate governance and reducing heavy-handed oversight. However, PSBs face substantial regulation and remain susceptible to political influence or perception, stemming from the regulatory framework governing them. They grapple with a plethora of externally imposed constraints, including dual regulation by the Reserve Bank of India and the Ministry of Finance.

The government has taken steps to enhance governance structures within PSBs. This includes the division of roles between managing director and chairman, as well as the establishment of a managing director and chief executive officer, along with a non-executive chairman. Additionally, the Financial Services Institutions Bureau, formerly known as the Banks Board Bureau, has taken on the responsibility of proposing candidates for non-executive chairs and full-time directors on the boards of financial services institutions. As the government's attention pivots towards fostering a more professional environment within PSBs, concerted efforts are underway to overcome the hurdles hindering this transformation and bolster corporate governance practices. By implementing robust corporate governance measures, the government aims to maintain influence over PSBs while simultaneously reducing political or bureaucratic intervention in their operations. This strategic approach ensures that PSBs operate with greater efficiency and accountability, aligning with broader national economic objectives.

The complexity of corporate governance in PSBs stems from the government's predominant control. The authority for appointing and removing directors and senior management lies directly with the Central Government, granting it broad powers to dictate PSB affairs and business operations. Additionally, the Central Government formulates schemes governing various aspects of PSB functioning, including capital structure and board composition. Given the government's multifaceted roles as promoter, manager, and regulator in PSBs, addressing the inherent conflicts and ensuring the desired level of autonomy for PSB boards are imperative for enhancing corporate governance. Without resolving these issues, improving the quality of corporate governance in PSBs will remain elusive.

A significant concern from the perspective of the broader public market is the fragmented regulatory landscape governing the Indian banking sector, which operates under three distinct laws, each with varying implications for governance and management influenced by promoters. The State Bank of India (SBI) operates under the SBI Act, while public sector banks have their own legislation, and private banks fall under the Companies Act. It's imperative to harmonise these regulatory frameworks by integrating SBI and other public sector banks into the Companies Act, ensuring consistency across the banking sector. Moreover, the existing statutes governing PSBs date back over 70 years, leading to regulatory gaps and challenges, including data management, security concerns, and outdated systems.

The State Bank of India (SBI) operates under the guidance of its central board of directors, which is influenced by directives from the central government in consultation with the RBI governor. This centralised control extends to directing the composition of SBI's board of directors. Further, PSBs operate within the statutory framework of the Banking Regulation Act, 1949, and the RBI Act, 1934, with the State Bank of India governed separately by the State Bank of India Act, 1955. This complex regulatory environment results in various arbitrages and limitations in the RBI's authority over PSBs, as regulatory power predominantly rests with the central government.

Dilution Of Government Ownership In PSBs: The government should consider reducing its shareholding in PSBs to mitigate political influence and improve governance. Even with reduced shareholding, the Central Government would retain control over critical operational aspects of PSBs in collaboration with the RBI, including priority sector lending and oversight of the board of directors. Additionally, the RBI would continue to regulate PSBs, allowing for sector-focused directives on fund deployment and ratios.

Consolidation And Updation Of Legal Framework: The Government ought to contemplate consolidating and streamlining the legal framework governing PSBs to ensure robust corporate governance standards and eliminate loopholes stemming from the multiplicity of laws. It is imperative to unify all banks under a single statutory framework overseen by a single financial sector regulator. This consolidation would promote clarity, coherence, and effectiveness in regulating PSBs, enhancing transparency and accountability across the banking sector.

Drawing The Parallel For Corporate Governance: To address the concentration of power within the Central Government regarding the appointment or removal of senior management in PSBs, it is prudent to draw inspiration from the mechanism outlined in the Companies Act, 2013, for the appointment of directors in public companies. For instance, certain public companies establish a nomination and remuneration committee, or NRC, comprising three or more non-executive directors, at least half of whom are independent. The company's chairperson may serve on the NRC, but they do not chair the committee. The Companies Act, 2013, mandates a screening process by the NRC to identify qualified individuals for directorship and senior management roles based on predetermined criteria. It is advisable to streamline the appointment process for directors in banks and establish uniform fit and proper criteria applicable across all banks. Boards should delineate clear performance indicators, responsibilities, and accountabilities for themselves and senior management, applicable throughout the organisation.

Furthermore, there should be robust mechanisms for disclosures, including information on transactions with affiliated and related parties. Provisions akin to Section 20 of the Banking Regulation Act, 1949, which prohibits loans and advances to directors and their connected parties, should extend to shareholders holding more than 10% shareholding in PSBs. Bankers have advocated for immunity provisions for board members, akin to the exemption granted to the top brass of the National Bank for Financing Infrastructure and Development , or NaBFID. Implementing a transparent system that assures protection for bona fide decisions could alleviate concerns and foster confidence in the governance framework.

Srinath Sridharan is a policy researcher and corporate advisor.

Sakate Khaitan, is senior partner at Khaitan Legal Associates

The views expressed here are those of the authors, and do not necessarily represent the views of NDTV Profit or its editorial team.