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

  • IASbaba
  • July 21, 2022
  • 0
Economics, Indian Polity & Constitution
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Syllabus

  • GS-2: Statutory, regulatory and various quasi-judicial bodies.
  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development

Context: The government has transformed Banks Board Bureau (BBB), the headhunter for directors of state-owned banks and financial institutions, into Financial Services Institutions Bureau (FSIB) by making some amendments.

  • The Appointments Committee of the Cabinet (ACC) has asked the Department of Financial Services to carry out necessary modifications in the Nationalized Banks (Management and Miscellaneous Provisions) Scheme of 1970/1980 with the approval of Finance Minister, and then notify the government resolution for establishing FSIB.
What is the importance of Public Sector Banks (PSBs)?
  • Backbone of Indian financial architecture: Since nationalization of State Bank of India in 1955, followed by more banks in 1969 and 1980. Public Sector Banks (PSBs) are considered lifeline of Indian economy. If their health is not good, then economy at large will also suffer.
    • The key objective of social control (PSBs) is to achieve the widest spread of banking credit, prevent misuse of banking assets, and direct larger volume of credit to priority sector to achieve economic development.
  • Financial Inclusion: Since the 1970s, public sector banks (PSBs) have been in the forefront of mobilizing resources from far flung rural areas as well as extending banking services in the remotest parts of the country.
  • Revenue to Government: PSBs have been paying a steady stream of dividends year on year. The government being the largest shareholder in PSBs, is the biggest beneficiary of these dividends. This is over and above the corporate taxes and other taxes that all corporate entities including PSBs have to pay.
  • Shoulder the responsibility of Riskier lending: The general refrain of PSBs is that they operate under constraints, are not on equal footing with private financial institutions and have to lend to certain risky segments of the economy as part of priority sector lending, as well as directed lending, sometimes under political compulsions.
    • The public and social responsibility is much higher for PSBs than what the private sector competitors have with them. The burden of social agenda has largely been shouldered by PSBs.
  • Liquidity in market: The growth of our economy depends on PSBs ability to flow credit to the market and maintain sufficient liquidity. If that doesn’t happen, the economy as a whole will shrink. To keep economy in good health, PSBs are simply necessary.
What has been the issues with Public Sector Banks?
  • 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)

What is Bank Boards Bureau (BBB)?
  • 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.
What were the issues with BBB?
  • 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.
What is the Financial Services Institutions Bureau (FSIB) that is replacing BBB?
  • 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.
What is the composition of FSIB?
  • 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.
What is the mandate of FSIB?
  • 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.

Mains Practice Question – In the context of the Delhi High Court order on the powers of Banks Board Bureau (BBB), government has established Financial Services Institutions Bureau (FSIB) to replace BBB. Elaborate.

Note: Write answers to this question in the comment section.


 

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