Do Indian banks, RBI have freedom? ------BY Tamal Bandyopadhyay,
In the case of RBI, it not only needs to be independent, but also must create a perception that it is independent
Thu, Aug 15 2013. 05 26 PM IST
What does freedom mean for the Rs.75 trillion Indian banking industry? Or, for that matter, the 78-year-old Indian central bank?
All interest rates, both for loans and liabilities, are free. Public sector banks, which roughly account for 70% of the industry, are board-driven and the government is their majority owner. The credit for the robustness of the system goes to the government as it always steps in to avert a systemic crisis and infuses capital whenever the banks need it. That’s about ownership. Does the government follow a hands-off policy when it comes to management? The answer is no.
The so-called independent directors on banks’ boards are selected by the government in consultation with the Reserve Bank of India (RBI), but they are often neither independent nor competent enough to make any meaningful contribution to board proceedings.
Even the appointment process of the chief executive officer is opaque. The government has dismantled the Banking Service Recruitment Board to hire employees, but the chairman is still appointed by the government. Should an executive first head a small bank and then migrate to a big bank? Or, should one straightaway head a big bank? Should the executive have at least two years of residual service to head a bank? There are no firm rules. It all depends on the whims and fancies of the government.
Banks still do not have freedom to hire from the business schools (there have been court cases on this) and they cannot decide on the pay packets of their employees. They need to abide by an industry-wide wage settlement for this. The trade unions are too powerful even now.
The salary of the senior management is relatively better now, but they are not comparable with their peers in the private sector.
Finally, the government still plays a major role in regard to which industry should get loan and what exposure should be restructured. Till recently, a senior bureaucrat in the finance ministry was teaching bankers even risk management.
But then, one also gets as much freedom as one deserves. Going by their record, not all bankers deserve it. In the last week of July, a very large public sector bank opened its 5999th, 6000th and 6001st branches at Tirupathur, Alangudi and Shivaganga in Tamil Nadu, finance minister P. Chidambram’s constituency, with much fanfare.
By no means is Shivaganga an under-banked district. Going by March 2012 data, on average a bank branch in India caters to 12,300 people. The average in Shivaganga would be less than half the nationwide average. Sill, bankers will rush to set up branches there to please the finance minister.
(This is called Flattery Culture which is root cause of all malady in Indian administration in my opinion -danendra)
They used to fight with each other to open branches at Jangipur in Murshidabad district of West Bengal, when Pranab Mukherjee was the finance minister.
Till such time that bankers’ mentality does not change, the finance ministry will continue to treat the banking system as a division of the ministry.
In the case of RBI, it not only needs to be independent, but also must create a perception that it is independent.
Skirmishes with the finance ministry on the creation of the Financial Stability and Development Council and the proposed sale of sovereign bonds give the impression that here is a central bank that is keen to be independent, but this impression vanishes when one sees the RBI governor, with the script for the central bank’s monetary policy in his brief case, meeting the finance minister in North Block every quarter.
We all understand that it is consultative process, but this can certainly be done through email, on telephone or video conferencing. The mandatory meeting of RBI governor with the finance minister on the eve of every monetary policy announcement strengthens the perception that the central bank is not independent.
Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.
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