The Indian experience shows recognition of (a) the importance of corporate governance and the challenges in redefining institutional relations in the financial sector in respect of PSBs; (b) the need for a broader view of enhancing corporate governance to take account of law and policy as well as the operating and institutional environment; and (c) the desirable changes in the composition and functioning of the board. The processes by which some progress has been made so far and actions contemplated are also instructive - needless to add that these issues and lessons have to be viewed as tentative, and of course, contextual.

Corporate governance in PSBs is important, not only because PSBs happen to dominate the banking industry, but also because, they are unlikely to exit from banking business though they may get transformed. To the extent there is public ownership of PSBs, the multiple objectives of the government as owner and the complex principal-agent relationships cannot be wished away. PSBs cannot be expected to blindly mimic private corporate banks in governance though general principles are equally valid. Complications arise when there is a widespread feeling of uncertainty of the ownership and public ownership is treated as a transitional phenomenon. The anticipation or threat of change in ownership has also some impact on governance, since expected change is not merely of owner but the very nature of owner. Mixed ownership where government has controlling interest is an institutional structure that poses issues of significant difference between one set of owners who look for commercial return and another who seeks something more and different, to justify ownership. Furthermore, the expectations, the reputational risks and the implied even if not exercised authority in respect of the part-ownership of government in the governance of such PSBs should be recognized. In brief, the issue of corporate governance in PSBs is important and also complex.

The most important challenge faced in enhancing corporate governance and in respect of which there has been significant though partial success relates to redefining the interrelationships between institutions within the broadly defined public sector i.e., government, RBI and PSBs to move away from "joint family" approach originally designed for a model of planned development. As part of reform the government had to differentiate, conceptually and at the policy level, its role as sovereign, owner of banks and overarching supervisor of regulators including RBI. The central bank also had to move away from sharing the nitty gritty of developmental schemes with government involving micro regulation, to a more equitable treatment of all banks as regulator and supervisor. Furthermore, the bureaucracy of RBI is accountable to the RBI's Board for Financial Supervision. The large publicly owned non-financial enterprise had to recognize the need for a more commercial and competitive approach with banks including PSBs in raising of and deployment of funds. Similarly, the PSBs had to reorient their approach to each other also with intensified competition engineered by policy while guarding against excessive risk taking as dictated by a supervisor seeking to meet international standards.

Another noteworthy aspect of enhancing corporate governance is the narrowing of gap between PSBs and other banks in terms of the policy, regulatory and operating environment, apart from some changes in ownership structures with attendant consequences. The PSBs as hundred per cent owned entities with no share value quoted in stock exchanges accounted for over three quarters of banking business seven years ago, while they now account for less than a quarter. A third area where a few changes to enhance quality of governance have been made or are contemplated relates to the manner in which chief executives are selected, the board is composed in view of induction of some elected directors, and the constitution of committees, including the Audit Committee. In this regard, it is noteworthy that recently, the functioning of bank boards in the private sector seems to have attracted significant adverse notice, both from market and supervisor. That the representation of RBI on the Boards is not desirable has been conceded just as RBI has expressed interest in divesting all its ownership functions.

The processes by which these changes have been and are being brought about may also be of some interest. First, RBI has taken initiative in bringing about changes rather than "keep aloof" from the regulated entities as pure theory may suggest. The developmental role of RBI, which was in the nature of promoting and funding of institutions or channeling credit to schemes under government approved plans has yielded place to the role of developer of a more robust financial system, especially banking structure and system. Sometimes, closer involvement of RBI in some transitional arrangements, such as in advising government on appointment of Chief Executives of PSBs was needed to bring about changes. The professional inputs as well as sensitising and creating opinion to enhance corporate governance was ensured by RBI through the Advisory Groups and Consultative Group mentioned.

Second, as Governor Jalan in his National Institute of Bank Management (NIBM) Annual Day Lecture articulated, markets are more free and more complex now; what happens in banks is a concern for all since there is fear of contagion and above all we live in a more volatile and interlinked world where effects are instantaneous. (Jalan 2002). Hence, in the process of making markets more free as part of the reform, RBI had to discharge its responsibility of equipping the participants, especially the most dominant segment viz., PSBs, to manage the complexities or simply to cope. Hence, RBI had taken initiatives in improving the competitive strengths as well as governance systems of PSBs while pursuing its objective of distancing, as a regulator, from the operational closeness with both government which is an owner of PSB, and PSBs which are the regulated.

Thirdly, the path of reform of which corporate governance is one element had to be considered carefully and evolved through a consultation and participation process at every step. Thus, the basic framework was provided by Narasimham Committees 1 and 2 in which all stakeholders were represented followed by a series of Committees and Consultation Papers to refine and redefine and apply the basic framework. The collaborative and consensual approach in the path of reform was adopted while the goals of reforms were to the extent possible well defined. The most recent example of this approach has been described in the Report of the Advisory Groups on various International Standards and Codes.

The Indian experience provokes some thoughts on a few fundamental issues in regard to PSBs and corporate governance. First, is public ownership compatible with sound corporate governance as generally understood? Since various corporate governance structures exist in different countries, there are no universally correct parameters of sound corporate governance. Government ownership of a bank, unless government happens to have such a stake purely as a financial investment for return, necessarily has to have the effect of altering the strategies and objectives as well as structure of governance. Government as an owner is accountable to political institutions which may not necessarily be compatible with purely economic incentives. The mixed ownership brings into sharper focus the divergent objectives of shareholding and the issues of reconciling them, especially when one of the owners is government. In such a situation, one can argue that as long as the private shareholder is aware of the special nature of shareholding, there should be no conflict. In other words, the idea of maintaining public sector character of a bank while government holds a minority shareholding is an intensified and modified version of "golden share" experiment of U.K. The question could still be as to whether such a mixed ownership is the most efficient form of organization, particularly for banks which are in any case generally under intense regulation and supervision.

Second, is corporate governance generally better in private sector, in particular, private sector banks? In regard to old private sector banks (i.e. founded in pre-reform era, almost all of them continue to be closely held and many of them resist broadening their shareholder base and thus avoid deepening of corporate structures. More often than not, takeover bids have been by equally closely held groups. As regards new private sector banks, which have been licensed after close scrutiny in the reform period, the promotees were expected to dilute their stakes to below 40 per cent within three years. In two of the cases, this is yet to happen, while in most cases, the banks continue to be identified with effective controlled by promoter institutions. Governor Jalan, made an interesting observation on this in a recent lecture. "By and large, the structure is very weak in Co-operatives and NBFCs for historical reasons, local practices, and multiplicity of regulators and laws. Old private sector banks also have very poor auditing and accounting systems. New private banks - generally good on accounting, but poor on accountability. More modern and computerized, but less risk conscious. One thing which is common to all is that corporate governance is highly centralized with very little real check on the CEO, who is generally also closely linked to the largest owner groups. Boards or auditing systems are not very effective." (Jalan 2002)

Third, how do the dynamics of insider and outsider models in terms of separation between ownership and management work in public vis-�-vis private sector banks? One view is that there is not much difference between public and private sectors in India. "The literature on the governance deals mostly with the financial disclosures and restrictions on the managements that remain within the corporation and the influence that the external stakeholder or shareholders can hold. But in developing countries, the problem is slightly the other way round. In developing countries and more particularly in India, the major corporate issue is not how outside financiers can control the actions of the managers but also how outside stakeholders including the minority shareholders can exert control over the big inside shareholders; and this does not apply only to the public sector, but it applies equally strongly or probably more strongly to the private sector as well." (Bhide 2002).

There are, however, significant elements of subjectivity. Governor Jalan feels that private sector has greater elements of insider model. "Public sector banks/FIs, for example, are more akin to the 'outsider' model with separation of "Ownership" and "Management". Private sector banks/NBFCs/Co-ops - much more "insider" models with families, inter-connected entities or promoters running the management." (Jalan 2002)

The dominant view, backed by more recent research is that the issue in India often relates to minority shareholder. "Rather than conflict between owners and managers of firms, it is the conflict between the interests of minority shareholders and promoters (say business groups) that is more relevant for India and that needs to be addressed. " (NSE 2001). In other words, if the governance structures are weak, the risks of private ownership of banks need to be assessed before embarking on large scale privatizations.

Fourth, is the performance of PSBs vis-�-vis private sector demonstrably better? The evidence here is not conclusive, because comparison is beset with several difficulties. Clearly, old private sector banks as a group do not perform well, while new private sector banks show good performance as a group better than the PSBs as a group. Given the size and variety of PSBs, it is possible to find banks that could equal the good private sector banks as well as bad ones. In addition, PSBs have to reckon the "legacy" problems, such as the non performing assets that they are saddled with. Some PSBs operate in relatively backward areas with limited discretion for management to pull out from such areas. The question still remains: whether there is a better pay off in enabling PSBs to improve their performance while promoting private sector banks compared to transfer of ownership and control from public to private sector? Will greater scope for mergers and acquisitions within and between public and private sector add to greater efficiency than treating public and private in a watertight manner?

Finally, what should be the most operationally relevant approach for enhancing governance in PSBs recognizing that the extent of public ownership is determined predominantly by considerations of political economy while the functioning of institutions could possibly be influenced by techno-economic factors. The Indian experience so far, including identified agenda for debtate, seems to indicate that, clear cut demarcation of responsibilities of various institutions and participants is critical since "joint family approach" needs to be ended with friendly but amicable "partition" of assets, liabilities and activities. This needs to be accompanied by transparency in dealing with each other and proper accounting of transactions which would be significantly in the areas of managerial reporting and financial accounting. Simultaneously, checks and balances should be consciously put in place to replace the tradition of all pervading bureaucratic coordination.

In brief, central bank has a developmental role even in the period of reform but it is a different type of role, namely not directly financing development but help develop systems, institutions and procedures to enable a paradigm shift in public policy and in the process enhance corporate governance also in PSBs, in particular. While legislative changes are necessary for an enduring improvement in corporate governance and such legislative changes are not easy to effect in a democratic multi-party Parliamentary system, it is reassuring to observe that significant improvements in corporate governance in the Indian financial sector are being effected even within the existing legislative framework.