Intro: Regulatory institutions will be strengthened with enforcement powers in all financial structures. What we saw in Sarda or many other fraudulent schemes during UPA regime was mainly due to absence of effective regulatory and enforcement mechanisms.
Recently, at the outskirts of Pune, Finance Ministry had a day-long brainstorming on the reforms in Banking Sector, involving all stake holders. Setting the transformative agenda for banking, biggest since banks were nationalised in 1969,
government is trying to ensure commercial autonomy to all banks, while bringing them under regulatory concerns. On the issues and apprehensions pertaining to this Shri Jayant Sinha, Union Minister of State for Finance had a frank interview with Prafulla Ketkar, Editor, Organiser and Nishant Kumar Azad, Sub-Editor. Excerpts:
- What was this Gyan Sangam all about?
Gyan Sangam was an unprecedented event in banking history of India in three major ways. Firstly, it brought the whole industry ecosystem together including bankers, academics, policy makers, insurance companies, etc. Secondly, we made it clear that we need to think on long term needs, plans and possible bold solutions or steps we need to take. Lastly, it was more a brainstorming. Besides Prime Minister and Finance Minister, Governor of RBI and all other major policy makers involved in the process were there to listen to what the industry people want and can commit so that we can take necessary policy initiatives. That is the reason we conducted it totally in a different environment at the IBM Campus, Pune. It was more a brainstorming, with multi way consultations and intention was to come up with the actionable suggestions. The reform plan we are working on will be as transformative as bank nationalisation was in 1969. Banking is the life blood of the economy and we want to reform it in tune with other major financial reforms.
- What is the crux of this whole reform process? Especially when the nationalised banks are facing crisis, they are under pressure to perform commercially and at the same time are expected to deliver on the fronts like Jan Dhan Yojna.
I agree there is a dilemma for public sector banks that they have to compete commercially with professionally managed Indian and international private banks on the one hand and they have to carry certain responsibilities with their ‘public’ character. The crux issue is we want to put all financial institutions on the level playing field. We want to be ownership neutral with all banks. It means all of them to be properly regulated for prudent and sufficient capital flow and deposits. Public sector banks will get commercial autonomy, while priority sector lending will be binding for private banks also. We want private sector banks to be publically more responsible while public sector banks to be commercially viable. Competitive autonomy and professionalisation for commercial viability should be applicable to all irrespective of ownership, and nature of banks is the clear idea behind this.
- You will also need a different recruitment and training structures of the public sector banks. Is government bringing any structure regarding this or each bank will have its own structure?
I think public sector banks have to make their own decision for commercial viability. Even on the issues of capability such as risk management and IT the respective boards will be empowered to take necessary decisions. As far as talent hiring and compensation practices are concerned, they are already freed up at the higher officer levels. Compare to public sector, private banks have world class talent in certain areas, which they are free to hire as per their requirement. There are many talented people with unique level of experience in public sector banks as well. They also have to be utilised. There are issues of wave of retirements, generational change, technology adaptation, but every bank is free to appropriately handle that to make work culture competitive. Unfortunately, everyone talks about capital shortage, but now we also have to think about the talent shortage. So focus has to be human resource oriented. But instead government banks should take a call on modifying and adjusting their HR policies to feel the talent gaps. As there are 27 public sector banks with their own priorities in terms of area and business government cannot take their commercial decisions. Professionalising and empowering boards is a step forward in this regard.
- There has been a talk about the proposal on merger and consolidation of banking sector. Many agitations have already taken place. There are apprehensions about this among smaller banks and cooperative sector banks. Are there any concrete plans for this in reform process?
Bank Boards are empowered to take decisions as happened in the case of Kotak Bank and ING Bank. If some banks in the public sector think through and decide to merge with a concrete proposal, Government of India as a majority shareholder will evaluate it on the case by case basis. We have to remember that we have diverse banking system with public and private sector bank, there are cooperative banks, regional rural banks, micro finance institutions, etc. RBI is licensing some more banks. Every institution will have to work out on its own winning strategy. Eventually, it may evolve that 3-4 banks emerge as real national international banks dealing in all kinds of businesses across India and even outside India. Others will be specialised banks with own strategies, focused areas and wining strategies. Being competitive is the key here.
n Don’t you think this will ultimately hamper the agriculture sector in India? Once banks are more competitive, they are less likely to work in rural areas and lend to agriculture sector.
We have to make sure that there is sufficient liquidity and credit in agriculture. This can be done by ensuring targets in this priority sector and transparent monitoring of it. All banks should incorporate this in their business model. NABARD and regional local banks will be strengthened for this purpose. I have moved a Bill in the Parliament so that regional rural banks can raise more capital. Cooperative societies and other micro-financing institutions
can also work in this as a specialised sector.
- What about the issues related to accountability and transparency? Across the world so-called competitive banks are facing crisis on this.
There is a difference between ownership and regulation. We will bring down our ownership but RBI is a highly professional institution, which will regulate the sector. They have sweeping powers of inspection and control. That is true even in insurance as IRDA is regulating both private and public sector.
So having a professional and sound regulator to supervise the industry is critical, which we are ensuring. Regulatory institutions will be strengthened with enforcement powers in all financial structures. What we saw in Sarda or many other fraudulent schemes during UPA regime was mainly due to absence of effective regulatory and enforcement mechanisms.
- How do you see the larger impact of these reforms on economy, especially when fiscal deficit and growth rate are still critical concerns?
Our economic philosophy is to build India’s productive capacity. It is not only in finance but also in power, infrastructure, etc we want to increase productive capacity including in terms of skills. Our focus is on supply side revolution so that we put in place the growth drivers to enable growth in an environmentally sustainable manner. We also want this process to be non-inflationary. It is not demand side oriented, so investment and productive capacity is the key to this philosophy.
With the cumulative effect in all sectors, we will see the net multifaceted impact of these initiatives. We are doing this because we have people’s mandate to do so, not because of IMF gun like in 1991. Making India really a developed nation is our goal. All these reforms will take us in that direction.
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