Rajan says Dept of Financial Services can be closed only after BBB comes of age

Former Governor Raghuram Rajan wants the Banks Board Bureau to reach the level of professionalism and independence that it would lead to closure of Department of Financial Services.

DFS, which monitors state-run banks, has created “sameness” among them and governs them “without responsibility”, he said.

“We need to have independent and professional boards in banks, independent of the government and have the ability to appoint and fire CEOs. When we get there we will have truly create the distance between the government and the public sector banks,” Rajan said.

One indication that we have achieved that will be the day we can close down the DFS

Rajan also fumed at the working of the Banks Board Bureau (BBB), and pitched for having banks run by independent boards and not the Finance Ministry.

The BBB, set up last year to bring in more professionalism in government banks,  has become just another “cog in the wheel,” he said.

According to him, so long as public sector banks are primarily governed without a board having the final ability to change management and so on, if they are governed by the ministry, then it is dual governance and often governance without responsibility.

BBB is not so clearly distinguished in terms of distance from the government.

“To some extent, it needs perhaps more work in order to strengthen its autonomy and independence. In the longer run, it seems to me that we need truly independent professional boards in PSBs, which have the ability to appoint or bar CEOs. When we get there, we would have truly created appropriate distance from the government and PSBs,” he said at the promotion of his book, I Do What I Do, in Mumbai late evening.

“The time or indication that we have achieved that (reforms in state-run banks) will be the day we close down the Department of Financial Services (DFS), whose job is to monitor these public sector banks,” he claims.

The BBB has “not so clearly distinguished in terms of distance from government and to some extent needs perhaps more work to strengthen its autonomy and independence”, he said.

Rajan said that ultimately, we need to put the responsibility on the boards, hold it to account, pay them for the job that they are doing, and ensure PSBs are governed.

The government can then exercise control “through its board members, but not through a separate governing structure outside the board,” Rajan added.