Rajan pitches for more independence to banks

Raising the pitch for independence at the government-owned banks, the Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday said banks should be able to take major governance decisions freely without having multiple authorities to satisfy, and even suggested for withdrawing RBI nominees from the bank board.

"Today a variety of authorities - Parliament, the Department of Financial Services, the Bank Board Bureau, the board of the bank, the vigilance authorities, and of course, various regulators and supervisors including the RBI -- monitor the performance of the public sector banks," Rajan said while speaking at the Ficci-IBA annual banking conference.

"With so many overlapping constituencies to satisfy, it is a wonder that bank management has time to devote to the management of the bank," he said.

Over time, the RBI should also empower boards more, for instance, offering broad guidelines on compensation to boards but not requiring every top compensation package be approved," he said, referring to the compensation packages of private sector banks which need to be approved by the RBI.

In the interim, till the bank boards are professionalised, he favoured the mandate for this to be vested with the fledgling Bank Board Bureau (BBB) so that it can help improve the governance and management structures at the public sector banks by allowing it to fully handle the appointments.

He also called for a level-playing ground for private and public sector banks. Wherever possible, public sector bank boards should be bound by the same rules as private sector bank boards – one reason why the RBI has recently withdrawn the Calendar of Reviews PSBs were asked to follow. Similarly, board membership of public sector banks should pay as well as private sector banks if they are to attract decent talent . He also said that anomalies in hiring should be lifted for the government-owned banks so that they could do more of campus recruitments.

Rajan also hoped that bankers will not repeat the irrational exuberance of 2007-08 while lending for enormous projects that are in the pipeline. He said agencies like CAG and CVC should get involved only in extraordinary situations where there is evidence of malfeasance, and not when legitimate business judgment has gone wrong.

"What is in the pipeline is truly enormous – airports, railway lines, power plants, roads, manufacturing plants, etc. Bankers will remember the period of irrational exuberance in 2007-2008 when they lent without asking too many questions. I am hopeful that this time will be different."

He reiterated that the riskier projects should have more equity from the promoters not fake borrowed equity, and the greater the flexibility in the debt structure. Promoters should be incentivised to deliver, with significant rewards for on-time execution and debt repayment. Where possible, corporate debt markets, either through direct issues or securitised project loan portfolios, should be used to absorb some of the initial project risk. More such arm's length debt should typically refinance bank debt when construction is over.

Banks, he said, should ensure that key permissions for land acquisition are in place and bankers should strive to have deep industry knowledge. Bankers should put in a robust system of project monitoring and appraisal, including, where possible, careful real-time monitoring of costs, he said.