Thursday, May 15, 2014

Ahead of Modi win, Reserve Bank recommends policy change: Don't apply RTI on nationalized banks

By Our Representative
Alarm bells have started to ring even before Narendra Modi has taken over as India’s Prime Minister. A high-level report of the committee formed by Reserve Bank of India (RBI) governor Raghuram Rajan to review governance of boards of banks in India has strongly recommended that public sector banks should be out of the purview of the Right to Information (RTI) Act, considered a powerful tool in the hands of people and activists to seek justice. Already, top Modi supporters have begun saying the right to information is a waste of public money (click HERE).
Prepared by a team of bankers headed by PJ Nayak, ex-CEO, Axis Bank, who was also ex-country head, Morgan Stanley India, the committee, constituted in January 2014, has identified applicability of right to information as one of the “several external constraints imposed upon public sector banks which are inapplicable to their private sector competitors.” It adds, “Each of these constraints disadvantages these banks in their ability to compete with their private sector competitors”.
The committee insists, “The government and RBI need to move to rapidly eliminate or significantly reduce these constraints, in the absence of which managements of public sector banks will continue to face an erosion of competitiveness”, adding, “it is only after these external constraints have been addressed would it be practicable for public sector banks to address a host of internal weaknesses which affect their competitiveness.”
Other “constraints” identified are dual regulation (by the finance ministry, and by RBI, which goes substantially beyond the discharge of a principal shareholder function); the manner of appointment of directors to boards; the short average tenures of chairmen and executive directors; enforcement of employee compensation; and external vigilance enforcement.
By way of example, the committee points to how the Axis Bank is free from any of these constraints. “The CEO is appointed by the bank's board, and because the bank was licensed in the private sector, it sets its own employee compensation, ensures its own vigilance enforcement (rather than being under the jurisdiction of the Central Vigilance Commission), and is not subject to the Right to Information Act”, the report states, suggesting this is exactly what should happen with public sector banks, too.
Objecting to the way nationalized banks are subject to the Right to Information Act, the report underscores that the government must “level the playing field for public sector banks in relation to their private sector competitors”. And for this, it recommends, the “government should consider reducing its holding in banks to less than 50 per cent.” This will ensure that “there is a restoration of a level playing field for public sector banks in matters of vigilance enforcement, employee compensation and the applicability of the right to information.”

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