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Reserve Bank of India has released a discussion paper on their website on June 11, 2020 asking for suggestions and comments latest by July 15, 2020.

The time given is not enough and it should be extended as it is going to be implemented only from April 2021. This is a crucial matter on which the paper should be made available in different languages and there should be public hearings in which the stake holders, especially the depositors voices should be heard.

A quick perusal of the paper shows that there is nothing new and the discussion paper has just followed what has been stated in 3 documents. These are Basel Committee recommendations on corporate governance, recommendations of the financial stability board and the recommendations of the Banks Board Bureau.

The paper says that these recommendations are applicable to SBI, nationalised banks and regional rural banks, private banks, small finance banks, payment banks, foreign banks and their subsidiaries.

On public sector banks including SBI it says “except in so far as what is prescribed is not inconsistent with provisions of specific statutes applicable to them or in case where the major shareholders / promoter viz. government of India retains its instructions”

The question is if it is inconsistent with specific statutes why at all they are prescribed.

Basel Committee recommendations are not mandatory. They are prepared to suit European and US Banks and does not rally apply to Indian situation. Similarly the financial stability board was constituted by G-7 and later extended to G-20 whose conditions are different. BBB is an unconstitutional authority to supersede some of the functions of RBI and make it easier for the government to impose what it wants. At the most these recommendations can be used by the first category mentioned above i.e. the private banks, small finance banks and payment banks.

The nationalised banks, SBI and RRBs are created as per law of the country and they have proper governance structure which only requires transparency and some more accountability. Their governance structure cannot be the same as private banks. They have a nominee of the Finance Ministry, RBI, share holder directors, directors nominated by government of India and employee directors (Officer and Workmen Category). Their structures have undergone various changes and there is scope for improvement but the same universal norms cannot be applied for all. Hence we have to demand a different set of norms where the stake holders, the depositors have to be given an important role. What we require for the majority of the banking system in India which caters to more than 70% of the depositors and borrowers is totally different. Here is what is required:

1. Transparent recruitment, promotion and compensation policy to get the best talents. Though the recruitment process is somewhat transparent (still has flaws) the promotion policy is not at all transparent and the compensation is much inferior to government salary as well as private sector salary and allowances.

2. Though the audit and vigilance functions are supposed to be independent, they are not, practically. So, we require a cadre for internal audits with internal banking experience but not controlled by the banks management. People from different banks can be pooled together and developed as an independent cadre.

3. Same is the case with the vigilance structure with accountability and transparency which can end favouritism, frauds and manipulations.

4. It is suggested that the decisions of the committees of the boards can be considered as final. These committees are chaired by the so called independent directors. This will be dangerous. Every decision should come to the board for approval and scrutiny.

5. The note talks about succession plan for the board. This is not possible in the present situation where banks board bureau takes the decision and appoints committee of the cabinet approves it. The secretary DFS and secretary, Dept. of public enterprises are members of BBB and they implement what the political masters tell them as they aspire for positions for themselves after retirement.

6. Ten years maximum tenure has been prescribed for whole time directors and chief executive officers. This again will be too long for public sector banks and should be restricted to 3 years.

7. Directors nominated by the government are considered as independent. How that is possible? Directors appointment process has to be redefined.

8. What we need are independent directors elected by the depositors who are the real stake holders. A process has to be prescribed to elect them and they should be also accountable.

9. The biggest flaw is that the discussion paper has forgotten the role of employee directors (one officer from major officers association and one workmen director representing major workmen union). Their presence ensures participatory management and also a watchdog role as they are eyes and ears of the employees as well as depositors. After 2014, the government has not appointed them inspite of directions given by the Delhi High Court. These positions were created after lot of debates in the parliament and they have to be honoured. If the government ignores the law of the land, it should be fixed accountability.

In addition to these what needs to be included in the new discussion paper, exclusively, one for private sector and one for public sector are

  1. How to bring in transparency in every activity including granting of loans, writing off of loans, investments and policies..
  2. Bring in accountability to follow environment protection norms, climate change norms, sustainable development goals for everyone including the CEO, RBI representative and representative of the Finance Ministry.
  3. Recommend immediate appointment of officer and workmen directors as per laid down norms.
  4. While electing share holder directors, minority share holders have to be given representation in the board. They cannot be elected by institutional investors who actually play a dominant role in election at present.
  5. A process for appointment of depositor’s directors should be laid down and implemented at the earliest so that depositors interest is really taken care of.
  6. Governance structure should start from grassroots – block level, district level, state level and national level with role for democratic institutions to have a monitoring role at different levels. Banks have to become real torch bearers of grass root development, equitable deployers of resources to bring equality and equity and partners in development with the real people (The majority).

For that this old wine in new bottle is not sufficient. Let there be public hearings, discussions and a new governance structure.

Thomas Franco is former General Secretary of All India Bank Officers’ Confederation.

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