Banking Sector Reforms

Bank Investment Company (BIC)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : BBB

Mains level : Paper 3- Bank Investment Company for governance reforms in the Public Sector Banks.

Banks, especially the Public Sector Banks have to play an important role in the pandemic afflicted economy. With that aim, the government has been envisaging the Bank Investment Company (BIC) for the improvement of PSB governance. The article discusses the issues with the BIC.

Background of the BIC

  • Recent reports suggest that the upcoming budget may include proposals for a Bank Investment Company (BIC), anchoring the government’s shareholding in its banks.
  • The BIC was proposed by the P J Nayak Committee constituted by the RBI in 2014 to examine governance at public and private sector banks.
  • The committee had offered two options — privatisation or a complete overhaul of bank governance.
  • The overhaul of bank governance is envisaged in the form of a gradual disassociation of the government from the operations, management and governance of PSBs.
  • The BIC is a welcome step in as much as it signals the government’s intent to pursue reforms to improve the governance and performance of PSBs.

Concerns with the BIC

  • The ownership and governance of the BIC itself will be crucial.
  • BIC will need to be allowed to garner the requisite talent and expertise and operate with freedom.
  • In the absence of this, it would merely add another layer while preserving the status quo.
  • The less than encouraging experience of the Banks Board Bureau (BBB) that was to precede the BIC is instructive.

Why BBB failed to achieve its objectives

  • The BBB was set up in 2016 to advise on the selection and appointment of senior board members and management.
  • However, in practice, the BBB’s advice has not always been heeded to, and appointments have not always been made on time.
  • The BBB, as originally conceived, was to consist of three senior bankers.
  • However, it was expanded to include representatives from the RBI and the government.
  • The BBB was also originally envisaged by the committee as a temporary arrangement.
  • However, no further steps have been forthcoming after its establishment.

Way forward for BIC

  • The government would need to ensure the necessary freedom for the BIC to operate while circumscribing its own role.
  • The ultimate success of these reforms will depend on how the government disassociates itself and empowers the BIC.
  • The objectives of the BIC would have to be clearly defined too.
  • If capital raising is one of the goals, the structure of a holding company — with a portfolio of comparatively better performing and non-performing banks — to attract investments must be assessed.
  • In this regard, the RBI has reportedly, in the past, expressed reservations on the BIC structure being a potential challenge for investors to assess the relative risks, returns and performance of the banks.
  • This raises the question of whether privatisation would not be a better alternative, particularly as the transition of the government from an owner to a pure financial investor in its banks is likely to take time.

Conclusion

Given these concerns, privatisation may be a better alternative. The budget could signal this intent by announcing the first step — the repeal of the Bank Nationalisation Acts and the State Bank of India Act.

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