PJ Nayak Committee report… How can such reports be written in 2014?

For a moment, I could not believe we could have such a report written in year 2014! After seeing what has happened in last 5-6 years, to have a report which says bank governance will improve if we privatise them. Really? Thankfully I am not alone thinking on these lines. As I was writing this piece came across these two EPW articles on similar lines – one (edit piece) and two ( By Prof TT Ram Mohan of IIMA. Prof.  TTR nicely titles it as  Bank Privatisation by the Backdoor.)

The huge response to this another hyped report from RBI stable is not really surprising. It is not the first report which talks of privatization of Indian Public sector banks. But like all RBI things these days, we are made to believe this is the first such attempt. It is one thing to argue for privatisation of banking  based on the premise that government should not be in businesses. But this thing that by moving to private banking way, will lead to better governance is like a big joke seeing how things have been globally. And I don’t even want to talk about the financial engineering to privatise PSBs suggested in the report .

The main point is that public/govt is all evil and private is all fair made sense before the global financial crisis.But it doesn’t make sense now.  The kind of governance standards we have seen in the so called doyens of capitalism (read private banks) has been so abysmal that there is no place left to hide. They have mismanaged most things under the sun and have brought enormous damage to the banking sector. These private well run professional banks have not just limited their abuse to their own houses but for the entire neighbourhood as seen in the case of LIBOR manipulation.  These private better governed entitites have completely damaged the central tenet of banking – trust.  Our PSBs misgovernance standards pale in comparison to the kinds of misgovernance seen in the western world of private banks.

And we still think that mere privatization will help in better governance? Really Sirs?

Infact, there are debates  on role of government in these banks. The public feels if state had some role in these banks, may be the excesses could have been avoided. BOE chief – Mark Carney in this recent speech points how the banking sector has bought so much mistrust to the entire industry (which was full of private players) and how government/BoE is trying to address the problems! Much of the banking world looked at London and its bankers in shock and awe before the crisis. Seeing how they created havoc since then has led to only shock and no awe. And here we are trying to get to the same world.

It is even more ironical that Chairman of the report actually rose to the ranks working in the government and gained a lot of reputation by heading a quasi public sector bank. Moreover, post his stint, he shifted to a foreign i-bank whose stories of shock are all over the place. Why can’t he point how he managed to run his Indian PSB in an efficient manner and point the mismanagement seen in his private foreign parent?

The report misses the most important point on PSBs – appointment of quality senior management. It is making sure that top staff of PSBs are appointed with expertise in mind. And it is not too difficult a task as made by the report and others. The chair of the report and many other PSB senior officials in the past (even in current) have shown the way. If the government can appoint our financial regulators (and other domains like judiciary etc) properly, why can’t we have the same for PSBs?  Why isn’t there any pressure on govt to ensure right people are there on board of PSBs? Prof. TTR article showed the current PM showed this way in Gujarat. If there is a huge hype around Gujarat business model now be applied in India, why not the same for PSBs?

I mean it is ironical to blame all things on government and government owned as much of so called reforms etc are driven by people appointed by the government. So why have so much distrust on everything government? At the end of the day, nothing else matters. If the government chooses its way we can surely make PSBs better governed.

Having said this, it might still not be enough. Even then one can never be sure as seen in the global financial crisis. The senior management of most global private banks came from top ivy league universities and had all the fancy skills one looks in banking these days. Banking is a pretty cyclical business and one only knows who is naked when the tide goes the other way (as said famously by Warren Buffet).

There is even a larger point here. The several committees appointed by RBI recently are just replicas of the financial sector report chaired by the now RBI Governor in 2007/08. The report was dropped as the global crisis hit the world and now the agenda is being driven full-force post the appointment of the same person as RBI Governor. One can say what any of these committees will say even before the report is released and none disappoint really. The various members of these committees show conflict of interest and it is all so superficial.  What is the point of appointing such committees which just say what the Governor wants to hear and has said before? These committees are then used as references by the Governor to stress on his agenda (as he can’t refer to his own report!). What an amazing way really!

And then these reports are very selectively using the global lessons before the crisis and ignoring the lessons post-crisis. For instance in the report on mon framework, one just does not give enough coverage on how several IT central banks have failed miserably. Just looking at their mandate really narrowly towards inflation targets, they missed the bigger bus of financial (in) stability. And even now despite having targets, the inflation runs much lower than their targets leading to deflationary situations in their economies. The critics are asking these banks to raise their inflation targets but they are unable to as they are trapped by their low targets. This was unlike RBI which looked at broader goals which surely helped both before and during the crisis.

The report on financial inclusion was way too ambitious and making you believe all that matters is financial inclusion. This is followed by this report on governance which just misses the global experiences in a grand way. The fourth report missing from the 2007 version  is one on pushing full capital account convertibility in India. I guess seeing the overall environment towards capital flows it has not been appointed yet. May be a matter of time…

Somewhere down, we never seem to be happy with Indian way of doing things. Despite its success, there is very little regard for the Indian way. We just want to do things the west way despite its multiple failures. The recent global financial crisis is a big turning point showing huge failure across public policy sectors in the west, but we keep ignoring these lessons. It is a pity that people sitting at the top don’t help in addressing this fallacy either.

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One Response to “PJ Nayak Committee report… How can such reports be written in 2014?”

  1. Dinesh Kumar Says:

    The biggest difficulty associated with private sector banks is that, it is very difficult to ensure that the asset allocation decided by the Boards of these banks is objective and based on merit. This is so because of the famous ‘free rider’ problem associated with public goods. In the instance of the 2007-08 financial crisis and with the ‘socialization of losses and privatization of profits’ practiced by many governments there, it is even more tempting and reassuring for the Boards of the private sector banks to indulge in practices which brought the financial crisis in the first place. This alone is a very strong argument against privatization of PSBs.

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