PSU Banks NEED More Freedom

PSU banks need to free themselves from government influence: Raghuram Rajan

Indian Express 20th May 2014 (My comments given below)

Pitching for greater operational flexibility to public sector banks, Reserve Bank Governor Raghuram Rajan today said they can become more competitive by distancing themselves from government influence.

“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. Competition will improve efficiency,” he said.

The remarks came in his annual day lecture of the Competition Commission of India (CCI).

Rajan said there are well-managed public sector banks across the world and even in India today.

“So, privatisation is not necessary to improve the competitiveness of the public sector. But a change in governance, management, and operational and compensation flexibility are almost surely needed in India to improve the functioning of most PSBs, as the P J Nayak Committee has just reiterated,” he added.

The Governor 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 and bringing more independent professionals on bank boards, among others.

“We need to examine all these ideas carefully, many of which will help give public sector banks the flexibility to compete in the new environment,” Rajan said.

He noted that 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, while retaining the talent they have, but to do so they need to be able to promise employees responsibility as well as the freedom of action,” he added.

Referring to financial inclusion, Rajan said the RBI will come out with new relaxations on business correspondents shortly.

Also, he said some of the entities that become payments banks may be very well suited to support or substitute commercial banks in reaching remote areas.

“In sum then, we can increase competition in the banking sector while, at the same time, strengthening banks by reducing the burden of obligations on them,” he said.

Speaking on the occasion, Competition Commission of India (CCI) chairman Ashok Chawla said the regulator has so far imposed more than Rs 8,000 crore worth penalties on various entities for anti-competitive practices.

The Commission has dealt with cases related to diverse sectors, he added.

He also said the regulator has so far received about 170 files pertaining to combination of entities.

CCI, which keeps a tab on unfair trade practices across sectors, has completed five years of existence.

Link Indian Express

My Comments are as follows 

I absolutely do not agree with the advice given by RBI Governor which prescribes more freedom to public sector banks so that these banks may become competitive. It seems to me ridiculous and untrue and hence unacceptable too.

In the year 1991, our government took the decision of following the path of liberalization, privatization and globalization under the leadership of the then Prime Minister Sri Narsimha Rao and under the guidance of great economist Sri Manmohan Singh. At that time too , it was told to the nation that public sector undertakings were unable to perform the best only because of government interference and bad governance and hence the then government took the decision to make these entities more free and liberal so that they may compete with their counterpart in private sector. Government decided to end license permit raj and gradually gave more and more freedom tp public sector.

Government with a view to create competition in the market and to make PSUs more efficient and competitive and people friendly,  allowed private sector to enter into banking, telecom , airlines etc. Unfortunately the medicine which was prescribed in the year 1991 to cure public sector and to improve health the health of PS banks, BSNL and Indian Airlines have failed to do so and rather they have contributed in making these Public sector undertakings more and more sick and are facing the risk of survival after enjoying freedom for last two decades and more.

Though government during last two decades provided huge capital support to PS banks, Indian airlines and to BSNL, these bodies are still facing capital crunch. Unfortunately these banks could not compete with new generation private banks like ICICI, HDFC and Axis banks, BSNL could not earn profit like Bharti and  Reliance, and Indian Airlines could not become performer better than Jet Airways, Sahara, or Kingfisher. Rather private sector entities in banking sector or telecom sector or airlines are able to earn more and more profit and are continuously on  growth trajectory under the same economic ( domestic as well as global),  and social conditions whereas internal health of public sector undertaking in these sector have deteriorated year after year.

It is undeniable true and known to all concerned that PSBs, Indian Airlines and BSNL all are surviving only because of Oxygen provided by Government though they have been given freedom to a great extent after 1991. 

Banks specially enjoy unlimited freedom in recruitment and promotions of their workforce, in setting up their loan policies, their interest rate structure for lending and what not. Before 1991 these banks were fully owned by government. But to make these banks competitive, government diluted their stake and allowed participation of people in share holdings.

 CEOs of banks were given freedom to frame their own lending and HR policies. But they completely failed to compete with private banks only because top officials of these banks remained slaves of ministers, politicians and big bosses of other regulating agencies like RBI. These CEOs inculcated flattery and bribery culture in their banks and hence the entire workforce became boss friendly sacrificing the interest of the organization they served.

Good performers were not liked by top officials in promotions whereas flatterers and bribe earners could get quickest promotions superseding several seniors. Officers like Ashok Khemka were placed in remote and critical centers and flatterers, corrupt and inefficient officers placed at cream places who could earn bribe and share with bosses.

 Bank management recruited officers in higher scale directly from market to give favour to their own kith and kin and to their friends and relatives or to earn bribe totally ignoring the career of two or three decade old experienced officers. This created a culture which was not all conducive for good performance but which created good environment for flatterers. And undoubtedly this is root cause of all problems faced by public sector banks. Same position is with BSNL and Indian Airlines.

Before 1991 , a bank officer could get hardly one promotion in 10 to 20 years whereas now bank management are so much liberal and free that an officer is getting four to five promotions in ten to fifteen years. They have merit oriented policies but the result of so called merit oriented policies have not improved the health of banks but helped in deterioration of health.

I am sure that health of public banks is not at all better than their health used to be before liberalization and privatization started in the year 1991. I therefore laugh when RBI suggest more freedom for PSBs to improve the health. Rather I think that RBI is trying to aggravate the sickness by treating the cause of sickness as cure for the sickness. They are committing the same blunder as Government of India for last two decades and more in curing the Indian economy with the medicine which in fact aggravated the illness of Indian economy.