Performance of Public Sector Banks has remained sub-optimal so far.  The Government is taking various steps to improve the situation both on governance side and otherwise.  The focus of these reforms is to improve the quality of deliberations in bank boards, leading to better asset quality and further resulting in better market valuations.

What has been done

(i)   Separation of the post of Chairman and Managing Director.

(ii)  Enabling provision for the appointment as MD & CEO in five major banks, so that wider choice is available.  Both Public Sector and Private Sector bankers can apply.  Higher salary can be given in appropriate cases.

(iii)  Revamping of present selection system which inter-alia includes structured three separate interviews, allotment of banks on merit-cum-preference basis.

(iv)  Blue print for road map for reforms on the basis of deliberations carried out in GyanSangam, a two days top level retreat organised by the department.

(v)   Allocation of capital purely on the basis of efficiency parameters so that banks start focusing on these.

(vi)  Clear instructions from the department regarding no interference whatsoever in any matter whether related to HR issues or credit decisions or even otherwise.

What Next

  (i)      In order to improve the Governance of Public Sector Banks, the Government intends to set up an autonomous Bank Board Bureau with professionals as its members.  It would be responsible for search and selection of heads of PSBs, as also for Non-Official Directors on the Boards of Banks.  This would be an interim step towards moving in the direction of having a Bank Investment Company.

(ii)      Guidelines relating to appointment of non-official directors is being revisited to ensure that bank boards get people with relevant expertise.  Anybody eligible would be able to apply through a website which will soon be available in the public domain.

(iii)     Government’s role in relation to public sector banks is that of promoter.  As a promoter, the banks have been entering into anMoU for achieving certain objectives known as Statement of Intent.  The whole system of Statement of Intent is being revised with provision for higher cash incentives.

(iv)  Government wants to encourage Bank Boards to restructure their business strategy and also suggest way forward for their consolidation and merger with other banks if it is win-win for both.

Bank governance reforms strengthen board selection and autonomy, creating an independent bureau for professional appointments and oversight. Public sector bank performance is being addressed through governance and operational reforms including separation of Chairman and Managing Director, expanded eligibility and compensation flexibility for MD & CEO appointments, a structured multi stage selection process with merit cum preference allotment, capital allocation based on efficiency parameters, and strict non interference directives. Planned measures include creation of an autonomous Bank Board Bureau to select bank heads and non official directors, revised appointment guidelines with an online application route, restructured Statements of Intent with higher cash incentives, and encouragement of board led strategic restructuring and consolidation.