13 JUL, 2012, 03.23AM IST, ET BUREAU

Babus should guide banks via boards: RBI Governor Duvvuri Subbarao

MUMBAI: The Reserve Bank of India Governor Duvvuri Subbarao signalled to bureaucrats in the finance ministry that they would serve banks better by pushing their decisions through the board of directors than other means, alluding to secretary (financial affairs) DK Mittal's frequent letters to bank chairmen on administrative issues.

The role of the government in various institutions where it is a stakeholder, is being debated amid questions on how it should play its cards when there are private stakeholders too, as in the case of listed entities.

"Occasionally, there are concerns over the government exercising its ownership rights not through the established channel which is the board mechanism, but outside of board,'' Subbarao said without mentioning any specific bureaucrat or an event. "There are questions about how the government will play out its ownership role. This is not restricted to Nabard, it is something which is being played out at a number of institutions, including the commercial banks.''

The role of Mittal, who is the finance ministry's representative on the boards of many public sector banks, including the State Bank of India, is being seen by some as interfering in the day-to-day affairs of banks which should be left to the management. But some say that his 'activism' is warranted with many state-run banks not really being pro-active. There are other instances such as the government forcing Coal India to sign fuel supply agreements with power producers which is opposed by institutional shareholders.

"I completely endorse his observation," said Bobby Parikh, partner at consultants BMR & Associates. "There are too many conflicts of interest that are created when the government acts beyond the boardroom to influence decisions. You want to run it on your own wit, don't list it. The minute you bring public shareholding, you lend yourself to the corporate governance practices that any other entity is liable to."

Mittal often writes to bank chairmen that make them wonder whether it is an official order to be executed or a suggestion. Also, since most letters are uniform across the banks, it becomes difficult to implement since different banks have different financial positions and priorities

"I don't think that it is a good example of good corporate governance,'' Subbarao was quoted as saying by the Press Trust of India. "One thing for the government could be to show exemplary behaviour of corporate governance and exercise their ownership rights through the board.''
The latest example of one such letter is the ministry's directive on the composition of banks' deposits