Baba’s Explainer – Financial Services Institutions Bureau (FSIB)

• PSBs have acted as shock-absorbers for the economy, by taking over failed private banks after every major scam;
• PSBs have been exploited by every government for its political agenda, while never putting in place proper human resource policies and investing in training and skill development;
• Every crisis led to the formation of a committee which painstakingly identified issues and offered solutions which were ignored (of special significance is the report of the independent commission headed by SP Shukla and backed by bank unions);
• Failure of supervision by RBI was responsible for most of the scams as well as protecting large defaulters by refusing to name and shame them almost until the bankruptcy proceedings began.
• The problem of the government as the owner of PSBs on five fronts—appointment of top executives, the appointment of directors to their boards, the working of the board, the internal working of the banks and failure to fix accountability.

Therefore, in the interest of maintaining credibility of PSBs which account for nearly 70%
of banking activity in the country, there is a need to ensure professionalism, efficiency, and autonomy in its functioning (undue political interference minimized)

• The Banks Board Bureau (BBB) has its genesis in the recommendations of J. Nayak Committee to Review Governance of Boards of Banks in India, May 2014.
• With a view to improve the Governance of Public Sector Banks (PSBs), the Government had decided to set up an autonomous Banks Board Bureau.
• BBB was mandated to make recommendations for appointment of whole-time directors as well as non-executive chairpersons of PSBs and state-owned financial institutions.
  • The Ministry of Finance has the final decision-making authority on the appointments in consultation with the Prime Minister’s Office.
  • In 2020-21, the BBB recommended a total of 38 candidates for state-run banks, insurers and other financial institutions. The government had accepted all the recommendations.
• Earlier, promotions and recruitments happened at the will and mercy of the government. The BBB aimed to prevent such red-tape and promote people based on merit.
• BBB would also help PSBs in developing strategies and capital raising plans.
• Banks Board Bureau is a self-governing autonomous body of the Central Government.
• It is an advisory authority comprising eminent professionals and officials to improve the management of Public sector bank. It was a public authority as defined in the Right to Information Act, 2005.
• Banks Board Bureau comprises the Chairman, three ex-officio members i.e Secretary, Department of Public Enterprises, Secretary of the Department of Financial Services and Deputy Governor of the Reserve Bank of India, and five expert members, two of which are from the private sector.

• There were issues regarding the greater organic linkage and dialogue with the finance ministry. It was alleged that on certain crucial postings, the ministry had not taken BBB into confidence while making appointments.
• The average time for making the recommendations was 72 days. This weighted average time taken for recommending the positions in PSBs was 76 days, in insurers (36 days) and in FIs (189 days).
  • Ideally, the new body should try to crunch the timelines for the appointments process, so that there is no gap in banking governance.
• However, the BBB’s biggest challenge was the legal hurdles over its power and jurisdiction.
• The Delhi High Court in 2021 ruled that the BBB couldn’t select the general managers and directors of state-run general insurers, as it was not a competent body.
  • Subsequently, at least half a dozen newly-appointed directors of non-life insurers had to vacate their positions.
  • More importantly, it led to uncertainties over the filing up of top posts at state-run insurers, with several appointments getting stuck in this process.
  • This High Court’s ruling on the BBB’s jurisdiction came on a case filed by National Insurance Company general manager Ravi, who had complained that people junior to him were selected by the BBB for the position of directors in public-sector general insurers twice.

Nevertheless, the Board has brought in a considerable degree of transparency and predictability to the selection process.

• Earlier, nobody really knew how the selection process went through; now we have a formal process of calling people, fixing eligibility, interviewing them and publishing it. To that end, the BBB has served its purpose.
• Many people acknowledge the role that BBB played as a centralised body carrying out analytics on senior-level HR and upgrading board-level governance.

• It’s a government body set up under the Department of Financial Services.
• The board will be entrusted with making recommendations for the appointment of full-time directors and non-executive chairman of state-run financial services institutions.
• It would also issue guidelines for selecting general managers and directors of public sector general insurance companies.
• While its main task is to play the role of head-hunter for the state-owned financial services entities, the board will also be involved in formulating and developing business strategies for state-run banks and help them in their fund-raising plans.

• FSIB would be headed by a chairman, a central government nominee.
• The board would comprise the Secretaries of the DFS, the chairman of IRDAI, and a deputy governor of the RBI.
• Additionally, it will have three part-time members who are experts in banking and three more from the insurance sector.

• BBB was envisaged as a body that would efficiently corporatise and make government entities function like private players, but it didn’t make much headway on that front.
• With FSIB, the intent is to go beyond the man-manager role and assist the government in formulating a code of conduct and ethics for whole-time directors in these entities.
• It would also monitor and assess the performance of public sector banks, government-owned financial institutions and insurance companies.