Intent good, faultlines many: Ex-dy RBI Guv on PSB revival

KC Chakraborty, a former deputy governor of the Reserve Bank of India known for his forceful pro-consumer stand, questioned the effectiveness of Indradhanush — the 7-pronged revival package for PSU banks launched earlier this week. He says the government's intentions are good, but it does not give out anything spectacular; nothing which were not known like capitalisation of banks. In an interview to CNBC-TV18, he gave his arguments against each of the steps taken by the government:On arming banks with new CEOs: Five banks have done it. What about the other banks? For one year you (government) could not appoint a CEO? Now you are bringing CEOs to big banks from very small private sector banks! I don't understand that. They may be very good, they may deliver the goods, but structurally I have issues because these are not with a lot of planning effort. On RBI and NPAs: One of the basic thing which we are saying in the circular that the Reserve Bank is not allowing to provide for additional finances wherever there is a stress in the accounts. What Reserve Bank is saying is if you restructure it should be considered as Non-Performing Assets (NPA), beyond that nothing. No where Reserve Bank is saying you cannot restructure an NPA account, you cannot provide additional finance. But what they are saying that if you restructure the account - now the government as a policy level is saying — you must specify this as a standard. Now these are not going to improve the balance sheet of the banks or improve lending standards. But I have no problem in general. If many of these things are implemented effectively we may not get 100 percent result but we will definitely get 80 percent result. Absolutely there is no problem in that. On assessing banks on profitability indicators: Let me say that a lot of people have applied their mind but if you see the way it has been structured and what I have understood - I may have less understanding - it is going to help banks whose performance is very poor.  Performance is to be judged based on the incremental performance. How much improvement you are making? If my ROA is very high, my performance will not approve. Now that is the basic tragedy, you cannot judge performance. If my cost-to-income ratio is very low, I will be not able to improve. In fact it may go up.  There is a systemic lacuna and that is why the best effective way of doing this thing should be for individual banks, their target and how much it can achieve based on that. You cannot keep a general thing. That is why there was the concept of SIP that individual bank wise it must work out. But then it has never been done.So, yes if you are trying to give a competitive framework, I have no problem but there are limitations. So ROE, ROA no problem but very high ROA for a bank is dangerous. Very high ROE for bank is dangerous because banks make more profit, customers make less profit. We have to understand at what level we can say ROE beyond certain point is not permissible. On Proposed ESOPs: This performance-based incentive was worked out when I was executive director in the year 2004-05 and ten years there is no inflationary effect. When you are giving ESOP, the question is on what basis you will give and what is the pricing? This applies across. ESOPs given to the private sector do not solve the problem. Many private sectors go bust, globally banks have gone bust. Now, I don't think compensation is a very big issue in the financial sector. In fact financial sector suffers from high compensation. You must make compensation transparent. We don't know the service condition of a bank chairman or executive director (ED) or what facility they get from the bank. Quantify the same on cost-to-company (CTC) basis and it must be done uniformly, across all public sector units. Without knowing that if you are saying we are giving ESOPs, we are giving higher compensation, it does not have any meaning. We must make this thing transparent including all perquisite, all facilities, whatever (cost) the institution is incurring on the senior management and it must appear in the balance sheet. I have no problem against giving ESOPs but unless it is done transparently it will create more problem. On bringing banks under Companies Act: Why do you have Banking Regulation Act? Why do you have State Bank of India Act? Why you have Nationalisation Act? Companies Act and Bank Regulation have to be separate. It cannot be done by the companies because banks are leveraged entities. You cannot just allow them to function like any other company. There has to be fundamental change in the regulation, it should be ownership neutral. If it is owned by the government, regulation is different, if it is owned by the private sector, regulation is something different. Now those are the reforms which are necessary in the area of regulation. Regulation should be principle based which Financial Services Regulatory Reform Commission (FSRRC) has recommended. It should not be either principle or rule based. In our country regulation is only discretion based. Note: Chakraborty was appointed deputy governor of the Apex bank in June 2009 and subsequently given a two-year extension. He resigned last April, three months before his term ended. He was heading the financial inclusion advisory committee.