Green indifference

Apropos Sunita Narains column Green

clearance test for NDA (Down to Earth,
August 25), the importance a government
gives toenvironment planningandprotection
can be seen by the way it is assigned in port-
folio distribution. Narendra Modi has tagged
this critical function with the ministry of
information and broadcasting and allotted it
to a minister of state. The link between the
two ministries is inexplicable.
Moreover, in his speeches, Modi has rarely
emphasised the necessity for saving the envi-
ronment as much as he has for saving electric-
ity or investing in manufacturing. No wonder
theminister inchargehasdecidedtogivepref-
erence to release blocked projects with
unholy haste so as to accelerate investment in
industry, create more jobs and promote the
countrysimagefor easeof business, relegating
the concern for environment conservation.
It is unfortunate that the government is
focussed on the prosperity of the current
young generation at the cost of endangering
the lives of future generations by destroying
the natural environment. The new govern-
ment should at least enforce legal pollution
control measures to save affected communi-
ties from air, water and noise pollution.
YGChouksey Pune
GST: Compensation issues?
This refers to Sukumar Mukhopadhyays col-
umn Time to move forward with a new GST
model (Expert Eye, August 25). The authors
anguish arising out of endless negotiations
betweentheCentreandstatesfor thepast eight
years, and a spate of fresh demands from the
states is quite valid. But the suggested model
will have problems on two major issues. First,
the burden of Cenvat on goods and services
after thegoods comeout of thefactorywill not
becreditedwhenstateGoodsandServicesTax
or GST (value added tax plus other state taxes)
isleviedandcollectedbythestates. Thesecond
issue will be administering state GST for inter-
state movement of goods, where the share of
state GST will accrue to the destination state.
The fresh demands of the states are mere
posturing to negotiate a higher amount of
compensation. Once the issue of compensa-
tion is settled, everything will fall in place.
Sumit Dutt Majumder New Delhi
Keeping bad assets at bay
This refers to the editorial Reconstruction
question (August 26). Till now, asset recon-
struction companies (ARCs) in India have
been nothing but a conduit for banks in help-
ing them convert stressed assets in the banks
balance sheet to investments.
Theprobabilityof thecreationof badassets
needs to be minimised. This will require a
revamp of the appraisal system of banks and
financial institutions (FIs). The system relies
heavilyontheperformanceof asector andthe
economyscurrent state. Whentheeconomyis
performing well, there is a huge rush by the
bankstofinance. Oneexampleisthefinanceto
the power sector, which now forms the bulk of
its non-performing assets. Numerous green-
field power projects are unable to operate at
projected levels due to the scarcity of coal and
gas domestically. A detailed forecast of the
economy and government policy is impera-
tive while considering big-ticket loans. But
banks and FIs need to study the impact of the
global economy as well.
VSridhar Kolkata
>
LETTERS
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10 ISSUES AND INSIGHTS MUMBAI | WEDNESDAY, 27 AUGUST 2014 1
>
I
t is the secret but illegitimate
wishof everylitigant toplant an
ally in the jury or the bench. If
the dream comes true, it will cut at
the root of independence of judici-
ary. The big fight over committed
judges has revived in the context
of the Judicial Appointments Bill.
But the principle of impartiality is
flouted persistently in the field of
arbitration, despite the Supreme
Courts call for achangeinthestan-
dard form contracts.
Normally, an independent arbi-
trator is appointed according to the
terms of the agreement. But con-
tracts offered by several govern-
ment entities carryaconditionthat
arbitration will be conducted by its
own officers. This is an utterly
unconscionable demand, but the
lure of government contracts is so
high that private firms sign on the
dotted line. Only when disputes
arise do they realise that officers of
the government corporations are
judges in their own cause.
Onemoresuchcasewasdecided
last week by the Supreme Court
wherethegovernment insistedthat
the arbitrators should be gazetted
officers and any vacancy should be
filledbyyet another gazettedofficer
from the same department (North
Eastern Railway vs Tripple
EngineeringWorks). Inthiscase, the
Railways terminated a works con-
tract, starting prolonged litigation.
The contractor failed in the Patna
HighCourt andtheSupremeCourt,
and then resorted to arbitration.
However, the arbitrators
appointed under the governments
General Conditions of Contract
were officers of the Railways. They
get transferred, promoted or retire
at crucial junctures of arbitration
proceedings. All these can be man-
agedat highlevelstodefeat thecon-
tractors cause. In any case, these
civil servantshavetoshowloyaltyto
their institution to advance their
careers, unless still higher consid-
erations swing their minds.
In this case, arbitrators were
appointedin1996but theyhavenot
decided the dispute till now. The
contractor, therefore, approached
the Patna High Court. It appointed
a former chief justice as an arbitra-
tor. The Railways appealed to the
Supreme Court arguing that it was
against the terms of the contract.
According to the arbitration clause,
onlyapanel consistingof threeoffi-
cers of the Railways can decide the
issues. Moreover, the general man-
ager canchangethearbitratorsmid-
way. The Supreme Court dismissed
theRailways appeal andupheldthe
nomination of the judge as an arbi-
trator. In extraordinary circum-
stances like these, the court can
dump the rule, it said.
This is not the first time the
court has taken such action. In one
leading case, Union of India vs
SinghBuilders Syndicate, the court
tossed the standard rule and
appointedaretiredjudgeasanarbi-
trator. The arbitration by officers
had dragged on for over a decade,
making a mockery of the process.
The judgment made some stinging
remarks: We find that a provision
for serving officers of one party
being appointed as arbitrators
brings out considerable resistance
fromtheother party. Havingregard
to the emphasis on independence
and impartiality in the Arbitration
and Conciliation Act, the govern-
ment, statutory authorities and
government companies should
think of phasing out arbitration
clauses providing for serving offi-
cers and encourage professional-
ism in arbitration.
Foreignfirmsmight besurprised
bysuchone-sidedcontractspersist-
ing inthis country. Ina recent case,
Bipromasz Bipron Trading SA vs
Bharat Electronics Ltd (BEL), the
court appointedanarbitrator disre-
garding the contractual clauses.
Accordingtotheagreement, theref-
erenceof disputeshastobemadeto
the chairman and managing direc-
tor (CMD) for arbitration. Whendis-
putesarose, theforeignfirmwanted
to nominate an independent arbi-
trator. BEL, the government corpo-
ration, objected to it pointing out
thearbitrationclausemakingitsoffi-
cial thearbitrator. Notingtheappre-
hensionof theforeignfirmthecourt
saidthat relevant facts wouldtend
toindicatethat thenamedarbitrator
is not likelytobe impartial.
In another case, Denel
(Proprietary) Ltd vs BEL, the court
reiterated that the CMD of BEL,
which is a government company,
wasboundbythedirection/instruc-
tion issued by his superior authori-
ties. The private companys case is
that it is not in a position to settle
the dues only because of the direc-
tions issued by the Ministry of
Defence. It onlyshowsthat theCMD
may not be in a position to inde-
pendently decide the dispute.
A few years ago, BSNL over-
played the card when it asked
Motorola to sign a contract that
read: There will be no objection to
any such appointment on the
ground that the arbitrator is a gov-
ernment servant or that he has to
deal with the matter to which the
agreement relates or that in the
course of his duties as a govern-
ment servant he has expressed his
views on all or any of the matters in
dispute. The Supreme Court dis-
missed BSNLs appeal.
Such unreasonable conditions
could act as deterrents in con-
tracting with the government.
Officials are possessive about their
right, and even flaunt it like Pooh-
Bah in the opera who acted as
judge, executioner and many oth-
er things simultaneously. It is time
to delete this unfair clause and
offer a level playing field to private
companies.
Committed and proud of it
How government officials act as arbiters in their own cause
>
HAMBONE
BY MIKE FLANAGAN
OUT OF COURT
M J ANTONY
M
inimumgovernment andmax-
imum governance was one of
the more appealing slogans of
the Bharatiya Janata Partys successful
electioncampaign. Howdoesthisapplyto
ourbanks?Thisisanimportant question
that has profound implications for the
long-termhealthof ourfinancial system.
The relationship between the gov-
ernment and banks is a complex one.
Governments the world over interfere
in the functioning of their respective
financial systems to varying degrees. In
lower income countries, government
meddling in banking manifests itself
most commonly through direct owner-
ship. At one extreme you have China,
where the banking system is over-
whelmingly state-owned and remains
an instrument of government policy. In
Brazil, the extent of public ownership in
the financial system is smaller than in
China but still significant. Aside from
the two largest commercial banks that
are used to deliver the governments
most important social welfare schemes,
the government uses BNDES, a devel-
opment finance institution with a bal-
ancesheet that accountsfor nearlyeight
per cent of thecountrys bankingassets,
to provide infrastructure finance.
In higher income countries, govern-
mentstendtostayawayfromdirect gov-
ernance of the mainstream banks now
andrelyonregulatorsinstead. However,
thesegovernments dousedirect control
over specialised institutions that they
ownor areotherwiseabletosubstantial-
lyinfluencetochannel credit insupport
of development or social priorities that
the mainstream banking system is not
typicallygoodataddressing. InGermany,
KfWsmissionincludessupport tosmall
andmediumenterprises andmunicipal
infrastructure, and it is funded through
bondsissuedoutsidethebudgetarybor-
rowing limits. Japan has its Housing
LoanCorporationandJapanPost Bank.
Inthe US, Fannie Mae, Freddie Mac and
Sallie Mae have beenused(andabused)
in an effort to make home ownership
affordable to sub-prime borrowers and
higher education more widely accessi-
ble throughconcessional student loans.
In India, the relationship between
government and banks is multilayered
and still rooted in the legacy of cen-
tralised planning. In the early post-
Independenceyears, thegovernment felt
the need for development finance insti-
tutions to helpmeet the capital require-
ments of heavy industry in particular.
ICICI andIDBI weretheoriginal govern-
ment-owneddomesticfinancial institu-
tions(DFIs) set upinthe1950sand1960s.
Thesewerefollowedbymanymorestate-
and central-level financial institutions.
Although ICICI and IDBI have since
becomecommercial banks, government-
owned DFIs such as Power Finance
Corporation and Rural Electrification
Corporation, mostly focussed on infra-
structure financing, have very large bal-
ancesheetsthat together account for the
lending equivalent of nearly eight per
cent of the bankingsystem.
Second, nationalisation of commer-
cial banks gave government direct own-
ership control over most of the banking
systemwiththe goal of facilitatingmass
bankingandtheflowof credit toagricul-
ture and the rural economy. Although a
numberof newprivatesectorbankshave
gainedinstatureover past several years,
almost 70per cent of banking assets are
still controlled by state-owned banks.
Starting in the early 1970s, nationalisa-
tionwas supplementedwitha thirdlay-
er of government intervention in bank-
ing. This layer comprised a whole
frameworkof microcontrolsthat includ-
eddistrict-level credit plans andtargets,
ReserveBankof India(RBI) controlsover
bankbranchexpansionandlocation, and
increasingly prescriptive regulations on
prioritysectorlendingthat remainasub-
stantial part of thebankregulatoryappa-
ratus almost two and half decades after
the launchof economic reforms
1
.
The consequences of this intrusive
and elaborate apparatus of government
engagement in the financial sector have
been mixed. First, public sector banks
(PSBs) haveundoubtedlycontributeddis-
proportionatelytothesubstantial growth
in bank branches per capita. Branches
per capitahave grownfive-foldsince the
first waveof nationalisationandabout 85
percentofbranchestodayarewithPSBs
2
.
Second, wereit not for PSBs andgov-
ernment-ownedDFIs, wewouldnot have
beenabletofundthemassivestep-upin
infrastructure investment that we have
seenoverthepast decade. PSBsandDFIs
account forover90percent of total infra-
structurelendingfromthefinancial sys-
tem, whichstandsat about 20percent of
total systemadvances.
Third, thesystemhasbeensuccessful
in maintaining advances to the agricul-
ture sector at around 12 per cent of total
advances, which is commensurate with
the sectors share inGDP.
These are three important achieve-
ments, but theyhavecomeat ahighcost.
The reality is that PSBs have had to
contend with externally imposed con-
straints that have systematically disad-
vantagedthemvis-a-vistheirprivatesec-
tor peers. PSBs are subject to directives
fromthefinanceministrythat areexplic-
it inthe formof guidelines and through
undocumentedsuasion. Thelatter has
contributedinpart totheescalatingasset
qualitychallengesof thebanks(PSBsup-
port for cash-strapped state electricity
distributioncompaniesandagricultural
loans that are waived by the political
establishment are examples).
Ineffect, PSBsaresubject todual reg-
ulationbythefinanceministryandRBI.
All PSBboarddirectorsareappointedby
the government based on criteria that
are oftennot clear. Handicapped by the
lackof specialist skills, thequalityof PSB
boarddeliberationstendstobepoor and
focussedmoreontactical issuesthanon
providingstrategicdirection
3
. Theaver-
agetenures of PSBchairmenandexecu-
tive directors are very short, and the
process of promoting talent to senior
positions has become bureaucratised.
Compensation structures have also
growndistortedsuchthat theyareinflat-
edat lower levels of thehierarchydueto
unionpressuresandareuncompetitiveat
senior levels if senior management
cadres areexcluded, theaveragepayper
employeeinPSBsisactuallyhigher than
for private sector banks.
This has exacerbated skill gaps
between PSBs and private banks.
Whereasprivatebanksmanagevigilance
quite effectively through internal
enforcement, external vigilanceenforce-
ment in PSBs through the Central Vig-
ilance Commission and Central Bureau
of Investigation appears to have slowed
decision-making and undermined risk-
taking skills without curbing unethical
behaviour. It is hardlysurprisingthat, as
I pointed out in my last article, these
banks nowneed ~2-3 lakh crore in equi-
tycapital over thenext four years ontop
of theirprojectedinternal accrualsjust to
ensurethat theyareBasel III-compliant
4
.
Thegovernment couldget awaywith
not addressing these issues if, like the
Chinese, it had the fiscal resources to
recapitalise PSBs. But it does not have
thesameluxury. It haslittlechoicebut to
rely on capital markets for the requisite
funds. But why will any private investor
support IndianPSBs that continue tobe
subject to a governance model that has
systematically eroded their financial
health? Clearly, if we are to restore our
PSBsbacktohealth, weneedtofigureout
ways to minimise direct government
intervention in their management and
improve their governance. More next
time onhowtoget this done.
Thewriterisexecutivechairman, IDFC
1Evolutionof BankingInIndia, RBIReporton
CurrencyandFinance, 2008
2BankingStructureinIndia: Looking
AheadbyLookingBack, DSubbarao,
August2013
3ReportoftheCommitteetoReviewGovernance
ofBoardsofBanksinIndia,May2014
4CallingPSUbankstoaccount(August5)
The Bharatiya Janata Party regime will have to make good on this election slogan to restore state-owned banks to health
Minimum government, maximum
governance in public sector banks
Happy birthday, B P Mandal
It was a good day for Mandal cousins Lalu
Prasad Yadav and Nitish Kumar on Monday.
Yadav-led Rashtriya Janata Dal (RJD) and
Kumars Janata Dal (United), in alliance with
the Congress, won six of 10 Assembly seats in
a by-poll in Bihar. The Modi wave had nearly
decimated Yadav and Kumar in the Lok
Sabha elections. The victory on Monday
brought hope to anti-BJP forces that Mandal
politics could still be the answer to defeating
the BJP. Interestingly, according to Upendra
Kushwaha, Monday was also the birth
anniversary of B P Mandal. Kushwaha, a
backward caste leader and minister of state
for rural development in the Modi
government, tweeted: August 25: former CM
of Bihar, the progenitor of Mandal
Commission and supporter of social justice to
backward castes, B P Mandals birth
anniversary. Respect. Neither Yadav, who
tweeted about the election victory from his
hospital bed, nor Kumar in Patna, were
awake to the significance of the day.
>
CHINESE WHISPERS
Realtors relocation service
Some of Mumbais top builders constructing
the expensive towers coming up in the
suburbs appear to have found a solution of
sorts to the citys chronic problem of slum
encroachments. These realtors have decided
not only to give these upscale towers security
within their compounds but also on the
pavements around them by putting in a
heavy-duty 24-hour guard detail. As a result,
encroachers have disappeared overnight
from around these buildings. Where do they
go? A builder says they supply these
displaced encroachers with information on
other pavements maintained by the Mumbai
Municipal Corporation. The municipal
officials, in turn, obligingly turn a blind eye to
any encroachment on these pavements, but
for a fee of course.
Coal comfort
The Bharatiya Janata Party (BJP) may be close
to completing 100 days in power soon but its
leaders occasionally struggle to get out of
opposition mode, having been in that
position for a decade. This was very much in
evidence when current minister for coal,
power and renewable energy Piyush Goyal
was asked to comment on Mondays
Supreme Court ruling declaring coal block
allocations from 1993 to 2010 illegal. Goyal,
who used to be spokesman when the BJP
was in the Opposition, appeared to have a
hard time concealing his glee since most of
the allocations were made when the
Congress was in power at the head of various
coalition governments. He drew journalists
attention to portions of the Supreme Court
ruling strictly off the record, of course to
show that arguments he had made as
opposition spokesman were correct. He also
took the trouble to advise some journalists
to read the judgment properly and then raise
questions on the modalities of the working of
the two governments. The subtext, of course,
is that these shenanigans were a monopoly
of the Congress and its allies.
RAJIV LALL
DOUBLE WHAMMY Apart from dual regulation by the finance ministry and RBI, public sector banks have had to contend
with externally imposed constraints that have systematically disadvantaged them vis-a-vis their private sector peers