A Reserve Bank of India working group on Monday called for a hands-off approach from the government when it comes to running state-run banks and financial institutions.
The government should transfer the actual governance function from finance ministry to boards and agencies such as trusts and special purpose vehicles, the committee said.
The process for appointing directors on public sector banks and institutions should be streamlined and professionalised and their compensation and remuneration package should be revamped, RBI's working group on "Conflict of Interest in the financial sector," said in its report released today.
This is important against the backdrop of recently given managerial freedom to public sector banks. The report said the accountability chain was very weak in public sector units and blamed the multiple agencies that worked in the sector bringing in inherent conflict of roles of the government as regulator, owner, adjudicator and executive.
"There is a virtual stranglehold by a multitude of agencies of the government, its officials, planning commission, comptroller and auditor general, Central Bureau of Investigation, Central Vigilance Commission over the working of the public sector enterprises," the report said.
These over arching controls over PSEs and their boards, arise from the view that PSEs are indeed government and that the boards are needed only for compliance purposes of the company law.
The central bank had constituted a working group, under the chairmanship of D M Satwalekar, managing director of HDFC Standard Life Insurance, to identify sources and nature of potential conflicts of interest in the financial sector in India and possible measures/actions to mitigate them.
The control structures and disclosure practices for private financial banks and entities should be consistent with interests of all stakeholders, it said.
The control in private concerns is often exercised through a complex pattern of cross-holdings involving subsidiaries, investment companies and others and investments by overseas institutions.The group recommended that the conflict management policy should be developed by each institution.
Key points
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Support transparency and accountability, protect customers, promote institutional and individual responsibility and build a supportive organisational culture
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Transfer actual governance functions of public sector entities to the boards
- Strengthen them by streamlining the appointment process of directors
