Partha Ray, Ph.D., is Professor, Economics, Indian Institute of Management Calcutta. Prior to joining Indian Institute of Management Calcutta, Prof. Ray, a career central banker, was the adviser to Executive Director, International Monetary Fund, Washington D.C. during 2007-2011.

The issue of selection of senior management in the public sector banks has attracted quite a bit of attention in recent times. As part of the Indradhanush proposal for public sector banks announced on Aug 14, 2015, the Ministry of Finance (Department of Financial Services) has decided to separate the post of Chairman and Managing Director. It prescribed that in the subsequent vacancies, the CEO will get the designation of MD & CEO and there would be another person who would be appointed as non-Executive Chairman of PSBs. The proposal also emphasized that the selection process for both these positions would be “transparent and meritocratic”. Consequently, private sector candidates were also allowed to apply for the position of MD & CEO of the five top banks (such as, Punjab National Bank, Bank of Baroda, Bank of India, IDBI Bank and Canara Bank).  But what would ensure professionalism in selection of the senior management of the public sector banks? It is in this context, that idea of Bank Bureau Board (BBB) has been floated in recent times.

To put the matter in perspective, it may be useful to recall that the idea of Bank Bureau Board came from a key recommendation of the Report of the RBI Committee to Review Governance of Boards of Banks in India (Chairman: P J Nayak), which was submitted in May 2014. The Nayak Committee Report mentioned categorically,

“The process of board appointments, including appointments of whole-time directors, needs to be professionalised and a three-phase process is envisaged. In the first phase, until BIC (Bank Investment Company)[1] becomes operational, a Bank Boards Bureau (BBB) comprising former senior bankers should advise on all board appointments, including those of Chairmen and Executive Directors. In the second phase this function would be undertaken by BIC, which would also actively strive to professionalise bank boards. In the third phase BIC would move several of its powers to the bank boards. The duration of this three-phase transition is expected to be between two and three years.”

Subsequently, the Finance Minister Mr Arun Jaitley in his 2015-16 Budget Speech (February 28, 2015) announced an intention to set up an autonomous bank Board Bureau (BBB). It was mentioned, “The Bureau will search and select heads of Public Sector banks and help them in developing differentiated strategies and capital raising plans through innovative financial methods and instruments. This would be an interim step towards establishing a holding and investment Company for Banks.”

Later the Indradhanush proposal for public sector banks of August 2015, it was further announced that, “The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for appointment of Whole-time Directors as well as non-Executive Chairman of PSBs. They will also constantly engage with the Board of Directors of all the PSBs to formulate appropriate strategies for their growth and development.” The structure of the BBB was conceived to be as follows: a Chairman and six more members of whom three will be officials and three experts (of which two would necessarily be from the banking sector)”. It was categorically stated that the Search Committee for members of the BBB would comprise the RBI Governor, Secretary (Financial Services, Ministry of Finance) and Secretary (Department of Personnel & Training, Government of India) as members and that the members would be selected in the next six months and the BBB will start functioning from the April 1 2016.

More recently, in end February 2016, Vinod Rai, former Comptroller and Auditor General of India, was named the first chairman of the BBB. Finally, the government set up the BBB in April 2016. The other members of the board included, Anil K. Khandelwal, a former chairman of Bank of Baroda; H.N. Sinor, a former joint managing director of ICICI Bank; and Roopa Kudva, a former managing director of rating company Crisil. The tenure of the Chairman and other members of the BBB will be of two years. Besides these members, as announced in the Indradhanus proposals, there are two representatives from the government: Secretary, Department of Financial Services (Ministry of Finance), and Secretary, Department of Public Enterprises. The Deputy Governor of the RBI will also be there in the BBB.

While members of the BBB are people of eminence with impeccable integrity and reputation, there are issues about its potential effectiveness.  Illustratively, presence of a large number of Civil Servants could be an issue. More interestingly, inclusion of the Secretary (Financial Services) both a member of the Selection Committee of the members of the BBB as well as a member of BBB may appear to be odd. After all, how different is the BBB from the current practice of Appointments Board? How can government interference be minimized in the appointment process? Such questions seem to be blowing in the wind.

More fundamentally, at the current juncture when the Indian public sector banks are plagued with the problem of non-performing assets and there are allegations of governance issues in select banks as a factor behind formation of such NPAs, there is an imperative for making the Bank Boards more accountable. But can that accountability come with the formation of BBB? Or, will such accountability need more fundamental reforms like divestiture of public sector banks that can make the banks subject to more market disciplines? Till such accountability process appears, formation of BBB can be a second-best solution. Nevertheless, to drive balance sheet improvement and consolidation in the banking sector, at the current juncture we need to wait for further actions of the BBB.

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[1] Nayak Committee recommended that Government should setup a Bank Investment Company (BIC), under Companies act, 2013 as a “Core investment company” and then should transfer its shares of public sector banks, to BIC. Finally, all public sector banks would be registered as ‘subsidiary companies’ of BIC, under Companies act. Since BIC would held more than 50 per cent shares in those company, BIC will be the parent “Holding” company and those banks became BIC’s subsidiary companies.