)
Prime Minister Narendra Modi had promised 'minimum government, maximum governance' during his successful election campaign earlier this year. The slogan appears apt for the country's government-owned banks, where governance standards continue to remain fragile.
From appointments of top executives to board-level deliberations and loan sanctions, there is lack of transparency in most decision-making processes. Governments change but how they run the public sector banks remains the same.
Several factors are responsible for governance difficulties in state-run banks. Dual regulation by the Union finance ministry and the Reserve Bank of India (RBI), the opaque process of appointing boards, short average tenure of top executives and significant compensation differences with private sector banks are some of the issues that need immediate attention.
"The challenge with public-sector banks is that with all the advantages of location, brand and human resources, they will lose their competitive advantage in the absence of sound, long-term management that can lead with vision and integrity. Good governance unfortunately is not a good-to-have requirement. It goes to the core of your organisation's ability to succeed and build and sustain value," Shinjini Kumar, leader - banking and capital markets at PwC in India, said.
Weak governance has led to lower productivity, erosion in profitability, deterioration in credit quality and hurt competitiveness in public sector banks. "If the governance of these banks continues as at present, this will impede fiscal consolidation, affect fiscal stability and eventually impinge on the government's solvency," a committee chaired by PJ Nayak (former chairman and chief executive of Axis Bank), tasked with reviewing the governance of bank boards in India, said in its report to the RBI in May 2014.
While private-sector banks are free from dual regulation, state-run lenders often have to abide by the directives of both RBI and the finance ministry. Consider this: Between October 2012 and January 2014 the finance ministry issued as many as 82 circulars to public-sector banks.
The issue of government interference in the functioning of state-run banks is a tricky one. A few believe such interference is essential to drive financial inclusion and sustain credit flows to priority sectors of the economy. But it also has its perils. There is now extensive research and documentation that indicates that lending by public-sector banks is often politically induced, leading to an increase in loan delinquency rates.
|
"It is a fundamental irony that presently the government disadvantages the very banks it has invested in," the Nayak Committee report said.
Globally, it is a mixed practice. While in lower-income countries governments interfere in the functioning of banks through direct ownership, in developed economies governments tend to stay away from direct governance of mainstream banks and rely on regulators.
Experts also criticise the process by which directors are appointed to public-sector bank boards. Often, criteria for such appointments are not clear. Politicians, petrol-pump owners and television anchors can be found on the boards of state-run banks.
"It is well established that the quality of governance has a positive correlation with the overall performance of any organisation. Instilling more transparency, reinforcing a culture of good governance across hierarchies combined with the right tone at the top are important steps in this journey. Public-sector banks should focus on developing an agenda which increases long-term value through better governance mechanisms," Himanish Chaudhuri, partner - risk consulting at KPMG in India, said.
The government plays a key role in the appointment of top executives. Chairmen and executive directors in public-sector banks are appointed by a government-constituted selection committee, which is headed by the RBI governor. (Typically, the governor nominates one of the deputy governors on the committee.) The committee also includes the financial services secretary in the finance ministry.
While the selection committee shortlists candidates, the finance ministry does have a strong opinion on the selection. Only after the finance ministry's go-ahead are names sent for the approval of the appointments committee of the cabinet.
This process results in appointment delays. For instance, the positions of chairman and managing director in eight public-sector banks are currently lying vacant, some of them for almost a year. The average tenure of the chairman is also short, leaving them with not enough time to implement their ideas in practice.
"At present, bankers get appointed to top management positions a little too late in their careers for them to have adequately long tenures. These top management positions are contractual, and end at the age of 60 or after two years, whichever is later. While some officers do get longer tenures, most do not," the Nayak Committee noted, suggesting that chairmen of government-owned banks should have tenures of at least five years and executive directors tenures of at least three years.
The faulty appointment process leads to poor quality of board deliberations. A scrutiny of board notes suggests that public-sector bank boards focus inadequately on long-term strategy and areas of concern. There is a general absence of calibrated discussion on non-performing assets, which continue to remain an area of concern for lenders.
The Nayak Committee found that in one bank the taxi fare reimbursement policy got the same coverage in board discussions as the bad-loan recovery policy. There are also examples where state-run banks have discussed details of a lecture by a bank chairman at a college, plans for extensive coverage of the finance minister's visit to a branch and probable disciplinary action against manager-level employees in their board meetings.
Wide compensation differentials at senior levels of public and private banks are also blamed for poor governance in state-run banks. Consider this: In 2012-13, the average monetary compensation for CEOs of new private banks was Rs 3.21 crore. In addition they received stock options, whose monetary value is dependent on the bank's stock price. Compared to this, the average monetary compensation for chairmen of public sector banks was Rs 18.66 lakh. Many believe that productivity suffers because of such wide variations in remuneration, and sometimes it encourages individuals to commit malpractices.
Earlier this year, Sudhir Kumar Jain - the now-suspended chairman and managing director of Syndicate Bank - was arrested by the Central Bureau of Investigation for allegedly having accepted a bribe of Rs 50 lakh from Bhushan Steel. He was accused of granting credit extension to the company despite it having defaulted on repayment of loans amounting to crores of rupees. Jain was also believed to be negotiating with other private companies, including Prakash Industries, for similar illegal gratification.
"There is a need to improve the compensation structure. I have known many bank chairmen for the last two decades, and I find those who were really honest are the ones who are struggling to buy a house in a metro city after retirement," Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services LLP and senior expert adviser for global financial services at Ernst & Young, said.
Experts suggest a complete overhaul of the system to improve the state of governance in public-sector banks. "Given the pressures on capital, growth and accountability, weaving risk-intelligent behaviour into the fabric of a bank's culture is likely to become a differentiator for a mature governance programme. Banks may need to manage governance by multiple actions, including creation of steering committees, effective challenge processes, quality controls, automated data management and risk-based governance mechanisms. Upgrading both technology as well as skill-sets will be top priorities of these banks, which would give an additional edge to the underlying governance systems put in place," Monish Shah, senior director at Deloitte in India, said.
At a time when the government is looking to sell its stake in these banks, which will help it to rein in the fiscal deficit, a professionally-run bank can get the right valuations. Clearly, it is in the government's own interest to loosen its control on its banks and leave the management to professionals.
