HYDERABAD: The chorus for the banking sector reforms is gaining ground, with the International Monetary Fund (IMF) in its latest report, stressing the need for deep operational governance reforms.
Though there have been several government initiatives to strengthen public sector banks’ (PSBs) functioning since FY17, implementation remains a challenge, and the multi-lateral agency wants it to be stepped up.
Stating the recent merger proposal of PSBs needs to be accompanied by ‘deep operational restructuring and far-reaching governance reforms’ to improve efficiency, risk management, and credit allocation as well as safeguards to maintain the soundness of the merged institutions, the IMF said the merger process itself could divert the focus away from the banks’ crore businesses and could affect their lending capacity in the immediate future.
“Unless supported by these measures, the merger would not address the underlying need for better risk management and greater efficiency and could result in larger and potentially weaker banks,” it noted. The banking reforms roadmap announced in January 2018 lists six reform themes including strengthening PSBs, including credit supply, and deepening financial inclusion and digitization. In line with the 2017 Financial Stability Assessment Programme recommendations, IMF suggests the government pursue reforms that can improve risk management and efficient credit allocation. “This would involve continuing to strengthen the quality and independence of banks’ boards, removing RBI officials from PSB boards and more aggressively pursuing PSB privatization and/or letting PSBs operate independently with accountability to the government,” it explained.
Furthermore, legal changes should be made to formally enable the RBI to ensure effective governance of PSBs and subject PSBs fully to banking and corporate laws that apply to private banks. Meanwhile, the IMF’s cross-country analysis of banks and EM peers suggests there’s scope to improve the efficiency of Indian banks, especially PSBs. The government, in its responses to the IMF, however, reasoned that it's PSB reform plan includes responsible banking, financial inclusion, while a more arms-length process of PSB management selection is being undertaken by the Banks Board Bureau to strengthen governance, functioning and quality of PSB boards.
As recently as August, the government enhanced PSBs’ management accountability to the board and allowing them to recruit chief risk officers from the market. Besides, the terms of directors on the board’s management committee will be extended to strengthen their contribution, loan sanction thresholds for the approval management committee of the board were raised to enable focused attention to higher-value loan proposals and a mandate was given to boards for training directors and evaluate their performances annually.
Needs legal changes
Legal changes should be made to formally enable the RBI to ensure effective governance of PSBs and subject them to follow banking and corporate laws