Culpability of the Department of Financial Services
Two of India’s finest economists have recently published a joint paper (Acharya, Viral V and Rajan, Raghuram G: Indian Banks: A Time to Reform) wherein they take a comprehensive look at what ails the  Indian banking industry in general and the public sector banks (PSBs) in particular and have suggested a road-map for its revival. The logic and arguments presented reflect their commitment, passion, vision and vast erudition on the subject. It is their considered opinion that the status quo is fiscally untenable. Even otherwise, reform of the financial system is critical for equitable growth of the economy and society. 
The moot question is: What would be the instrumentality for bringing about the desired changes? Rather, is it desirable that the reforms be handled by the department of financial services (DOFS), of the government of India (GOI)? In the absence of fully empowered boards of the individual PSBs there does not seem to be an alternative to handle this very critical task. This aspect takes importance since one of the recommendations in the paper is for winding down of DOFS.
DOFS is the latest avatar of the banking division of the ministry of finance which was upgraded to the department of banking when 14 major banks were nationalised in 1969. Since then, DOFS has been the means through which GOI controls the banking industry, especially the PSBs. The directors on the boards of PSBs are handpicked by DOFS while all top management positions are also decided by them.  
The influence of DOFS and its officials on the PSBs does not stop there. Many of the interactions between officials of PSBs and DOFS would not fall under the category of corrupt practices under contemporary social norms. Things like getting someone to put in a kind word for getting a favoured posting, or getting a transfer from what is considered a bad posting, or wriggling out of some disciplinary proceedings. It is a very small progression to the use of recommendations for promotions and more. The quid pro quo is also something which is readily accepted by many. Arranging guest houses and cars. At times, it gets a little further – after all, giving and receiving Diwali gifts is a well accepted tradition. It always helps to keep the mandarins of DOFS in good humour. Virtually every top manager of any Indian bank has to maintain good relationship with DOFS to remain functional. 
Under the stewardship of DOFS, over half a century, the key jewels of our society have been utterly destroyed. Over this period, the market share of the PSBs has fallen from over 95% to around 60%, massive amounts of funds have had to be periodically infused (Rs4 lakh crore over the past nine years) by GOI as equity to keep this key sector of the economy afloat, some of the most skilled, talented, and experienced managers have moved out of this industry segment, employee productivity has reached abysmally low levels with low motivation levels due to rampant nepotism, the governance of these organisations has been neglected to the extent that they are unable to take their own basic operational and managerial decisions and have been reduced to dependence on DOFS for even basic requirements, the boards do not even have the powers or capability to evaluate and recruit their own top managers, leave alone give strategic guidance. The list is virtually endless. 
The culpability of the DOFS in the colossal failure of our PSBs needs to be closely examined. The FM needs to question the top mandarins of the department about how under their charge such a state of affairs has come to pass. The political parties need to question the FM both inside and outside the parliament. The media and academia and the general public should question the political parties. 
The three Cs (CBI—central bureau of investigation; CVC—central vigilance commission; and CAG—comptroller and auditor general of India) should also try and prove their mettle in examining and laying bare the role of DOFS in the slow but steady deterioration in the financial and operational health of our nationalised banking industry. Aspects which need to be examined and laid bare include the extent of meddling in transfers and promotions, pushing recommendations for loans to favoured borrowers, and in general destroying professionalism.  The fall in the performance of our PSBs is not due to lack of competence or professionalism of its managers—the same people have excelled outside the enervating atmosphere of PSBs both in India and abroad.
Dr Acharya and Dr Rajan argue in their paper for the winding down of DOFS. An immediate abolition would create a vacuum which would lead to a total collapse and cannot be considered either feasible or desirable. Similar suggestions for paring down the role of DOFS have  been made time and again for long. Way back in 1991, in a Note to the Narasimham Committee – I had suggested,along with two of the members (Prof M Datta Chaudhury and Shri M R Shroff) inter alia, that “the government should not appoint its officials on the boards of public sector banks and financial institutions. The banking division of the ministry of finance, as at present constituted, should consequently be abolished.”  But DOFS goes on majestically unperturbed – destroying our banks without care or accountability. 
3 years ago
DoFS is a department under Ministry of Finance. If it is abolished there would be other agencies in MoF which would manage the PSB. Do you mean the PSB should never be governed by MoF or Government? That is possible only after full privatisation.
Replied to Newme comment 3 years ago
The issue is how to ensure good quality governance. DOFS, with its abysmal 50 year track record, as a key instrument of governance of PSBs has failed. One possible solution, is to have accountable and professional boards for PSBs as suggested by the Nayak Committee. Privatisation of banks also has its own set of problems.
3 years ago
First time hearing about an Organization called DOFS. Thanks to MoneyLife for such articles which helps common people like me to educate myself.
Meenal Mamdani
3 years ago
This is shocking. We would not even know about this had the two economists not brought this to light through their paper.

Obviously this has happened under both Congress and BJP govts.

Are the bureaucrats so powerful or do the ministers feel helpless as they do not understand the issue and therefore just do what the bureaucrats advise?
Replied to Meenal Mamdani comment 3 years ago
Various experts have been recommending for abolishing of DOFS (starting from its previous avatars, starting at least from 1991!
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