Bank Board Bureau's 1st meet today: What's on agenda?
The newly appointed Bank Board Bureau, headed by former CAG Vinod Rai, will hold its first meeting today in Mumbai.
RBI Governor Raghuram Rajan along with the Minister of State of Finance Jayant Sinha are also expected to be a part of the meeting to discuss the revamping strategies for seven public sector banks.
In an exclusive interview with CNBC-TV18, Leo Puri, Managing Director of UTI Asset Management and Usha Thorat, Former Deputy Governor, Reserve Bank of India, threw light on what could be the agenda of the meet.
The experts say that the bureau has primarily three tasks to complete- governance, capitalisation, improving industry structure.
The sequence of these three tasks matter, said Puri, adding that some steps have been taken in each direction.
Puri added that the board should look at strengthening the governance first and then shift focus to capitalisation and then consolidation. However, he maintained that given the urgency of the situation and the limited fiscal capacity, the government looks inclined towards exploring the industry structure first.
Usha Thorat believes that BBB should fill up all the empty seats in most of these banks by bringing in people at the director level and and complete the appointment of chairman and non-ex chairman, along with optimising leadership skills and human resorces.
Below is the verbatim transcript of Leo Puri and Usha Thorat’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: What is the best way in your assessment for the bureau to go about the revamping of the public sector banks?
Puri: I think the bureau has three tasks broadly. There is governance, capitalisation and consolidation if you like or improving industry structure. I think the issue that I assume they will discuss today in terms of priorities is in what sequence does it make sense to actually achieve these goals. I think as of now you can see that there has been some steps taken in each direction, little bit of governance improvement, little bit of capitalisation and some talk of consolidation.
Ideally, of course you would want to if in a perfect world, work to first strengthen governance and then essentially think about capitalisation and industry structure would follow. However, given the urgency of the situation that we have and given the limited fiscal capacity and the limited ability of the market to support capitalisation, the government appears inclined to seriously explore industry structure as the first step. So, it will be interesting to see how that sequencing actually plays out today.
Latha: How would you put the sequencing, what should be the priority for Bank Board Bureau (BBB)?
Thorat: I sort of feel also with Leo Puri that normally the governance structure, the capitalisation and then looking at the overall structure would have been a more logical sequencing. However, it is not necessary to do it exactly one after the other, the thought processes can go on simultaneously. So, I feel that there are vacancies currently in many of the individual bank board’s which I think the priority of the BBB should be clearly to fill those up because they are hampering the operations of the banks.
I think even despite all the consolidation, ultimately these things do take time; consolidation is not an overnight process. So, in the interregnum you are going to have these banks functioning. So, I feel it is extremely essential to strengthen the banks boards, bring in some professionals at the director level, finish the appointment of the CEO or the Managing Director wherever they are necessary and complete the non-ex chairman appointment. I think that is clearly to me a priority.
Secondly, as far as the infusion of capital is concerned and that is where the concern comes from and that is where what is driving this whole consolidation is because it does sort of seem to -- capital is scarce, capital is costly and it is necessary to conserve capital and currently you have a huge amount of duplication, overlapping. What is more, you have to optimise the leadership and the human resource skills also which are quite in short supply. After all leadership skills are not so available in banking and having them over 19 banks is a tough call and all kinds of wasteful competition amongst banks.
So, this is what Narasimham Committee was had suggested way back and I think it has just been delayed. So, the other argument, I am not getting into argument of consolidation but I do feel that the urgency given to consolidation, the seriousness with which government is setting about it, I think is important.
Sonia: From a stock market point of view, there is a bit of concern about what the impact or the damage from the write downs will have to be that some of the larger banks will have to take as and when they take over the smaller bleeding PSU banks. In your mind what could the impact be, I am not trying to put any number to it but how damaging could it be?
Thorat: I think in any consolidation it is important that the merged unit is stronger than the sum of the individual units put together. It has happened and we have the case of the IDBI as well in India where the merged unit lost its strength. So, it is very important that it won’t pull down what are the already relatively stronger banks within the system.
Now, you might ask me there are signs of weaknesses in all the banks so which ones can you say are relatively stronger. However, for that we have to go over systematically, the weakness, because some of the banks have got better credit underwriting systems as a systemic thing and some have definitely been on the weak bank list for ages. So, somewhere we have to take the concept of a narrow bank and let the weak banks which have got inherent weaknesses really shrink. Therefore the capital should be really deployed in the banks which have, I would not be able to say but certainly have seem to have done better with the capital.
So, it is very important I feel in capital infusion and consolidation that is the reason why the government is I think thinking of it together. However, it doesn’t happen overnight and in the meantime you have to give a direction to the banks. So, I think that is where the struggle and the challenge is.
Latha: You correctly pointed to the example of IDBI Bank where the erstwhile IDBI Bank actually was a strong fellow who got swamped into the larger one which had more problems. Therefore, would you expect that the Bank Board Bureau should allow some of the smaller PSU banks to simply become what they call niche banks, just squeeze out capital till they turnaround and not poison a bigger bank with them?
Thorat: That is what I call the narrow bank concept. Basically they just shrink in terms of market share but in terms of size, they won’t exactly become smaller. However, certainly they will not grow the way that for the targets for growth for them would obviously have to be very much scaled down. I think the combination of both the things have to utilised.
Latha: How can the government or the Bank Board Bureau strengthen the boards? At the moment they are seen as political puppets, there were times perhaps which you would know when bank boards were fairly strong entities and could give kind of a buffer for the chairman from political forces. Mr Malegam gave us a string of instances actually. Now that power of the board appears to have evaporated. What do you think you want to hear from the Bank Board Bureau?
Puri: My view is that it has been now several decades since in a way the rot had set in into the public sector banks. I think Usha referred to Narasimham Committee, this has been known for at least a couple of decades now that because of a combination of internal skills erosion, misguided political patronage, issues to do with compromises with asset allocation and credit allocation and corruption of course as well embedded in there to some extent, all of this had deeply eroded the banks.
So, I think the underlying question is that 50 years after nationalisation, when we have achieved the goals now of financial inclusion, we have removed whatever concerns there were about monopolies, we just have to actually in a structured and mature way debate how you are going to transition from a state owned banking system to one which is more market linked. The way I see the role of the Bank Board Bureau is to find a way to reintroduce market principles into the banking system. You may not be able to do this overnight, you can innovate, think of the Bank Board Bureau as providing a rehab center, it is a sort of rehabilitation process for an entity or category which has been deeply damaged. This is not superficial damage that has actually taken place that can be corrected by rotating a board member or simply changing a bank chairman.
Usha Thorat knows better than most of us but I have also had the opportunity over the last two decades to look through various lenses, as an advisor, as an investor and so on, and it is very deep rot and we need to confront that rot. In a way that is what the Nayak Committee report very eloquently brought to the fore. So, we must not treat this as a taboo topic or a topic to be handled with kid gloves, it is the best thing we can do at this point is to openly acknowledge the very deep rooted problems and develop a cure that is commensurate with the extent of damage, not applying asprin when you need a bypass.
Now that is just a metaphor to try and provide what I think should be the right area of focus for the Bank Board Bureau. I think you have excellent people there, they have the capacity to think about these issues very comprehensively, very well selected group of people and if they are given the freedom, I think they can actually think about this in a much deeper, more profound way which will give us more long lasting benefits I hope.
Sonia: Let me try delve a little deeper because there are some combinations that have been considered earlier by the finance ministry and I wanted your thoughts on which looks like the most prudent combination? First option is Punjab National Bank (PNB) under which could come Indian Bank and Dena Bank. The other consolidation option suggested is Bank of Baroda (BoB) which could take over Syndicate Bank, Indian Overseas Bank (IOB), United Bank of India, there is another one suggesting Canara Bank that could take over Central Bank of India and Oriental Bank of commerce (OBC) and then Bank of India (BoI) taking over Allahabad Corporation, BoM and Punjab Sind Bank. I just wanted your views on what could be the most likeable or a plausible combination amongst all of this?
Puri: This patch making game is interesting but the underlying question is what is the criteria you are using and in any consolidation process, ultimately you have to, in fairly granular detail, start to really understand what the synergies are. So, if you were to bring a set of banks together, what are you achieving in terms of synergies as regards either management capability bad bandwidth, geographic reach, certain segment skills or product skills that are unique to each bank and which brought together can make one plus one equal three, access to funding and balance sheet management and treasury management, forex related, capital market related skills which can actually enhance this.
This is the point of the Bank Board Bureau, it is actually equipped I believe to carry out a very detailed granular analysis around synergies. So, there is again a market linkage, market rationale. Ultimately consolidation is not an end in itself, you want to come out with an entity as Usha said where the sum is greater than the parts because you are going to have to go back into the market and ultimately raise capital with a story to tell and if that story doesn’t clearly bring out how the underlying synergies have been thought through, then this would have been a fairly ideal process.
Nobody can claim to have a pre-existing right to lead this. Simply because I am large player, it does not qualify me to essentially be the anchor or to lead consolidation. If I am fundamentally able to anchor the synergies, that is the basis on which we need to think this through. Some of the banks you mentioned have that capacity. Bank of Baroda (BoB) for example should clearly be an anchor bank in any process of consolidation.
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