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Debashis Basu: The bigger changes public banks need

Debashis Basu 

Debashis Basu

Last fortnight, I asked whether the chowkidar Prime Minister Modi will focus on public-sector banks (PSBs), which are hotbeds of institutionalised corruption. On October 27, the government announced that it has decided to cancel the current selection process of chairmen and managing directors (CMDs), and executive directors (EDs) of PSBs. So eight posts of CMDs and 14 posts of EDs would require to be filled up afresh. Unfortunately, this will make little difference; a completely different approach is needed if PSBs are supposed to be more efficient.

To start with, the decision was a result of a report of a three-member committee - secretary (expenditure), the governor of the Reserve Bank of India (RBI) and, surprisingly, secretary (school education). Note that there were no bankers in the committee. It is unclear what contribution came from the two eminent IAS officers, neither of who have any truck with running banks.

The RBI governor is aware of the rot and hopefully spoke his mind in the committee instead of being politically correct. Unfortunately, he was trying to argue a few months ago that bankers are scared stiff of the sword of vigilance inquiry hanging over their head and are, hence, unable to take decisions. He ignored the fact that no bank chairman has paid a price if banks are found to be horribly short of collateral - a cardinal sin in banking that happens routinely in our nationalised banks.

It appears that a new selection process will be developed and vacancies filled up quickly. The government has announced that the RBI Governor or his nominee of the rank of deputy governor should be a part of the selection process (the governor already is). We don't know yet what the new selection process would involve, but the existing one is a sham.

Bank CMDs and EDs are chosen by a selection board, which is headed by the RBI governor and includes officials from the finance ministry, external experts and sometimes bankers. The real decisions are made by politicians and bureaucrats, mainly those running the finance ministry.

This is why the eligibility criteria are kept vague and changed frequently for mysterious reasons, giving politicians the opportunity to push candidates who agree to ratify their dubious deals. In May 2011, the government suddenly announced that since PSBs were facing a shortage of talent, the criteria for selection of CMDs would be relaxed. In October 2013, the finance ministry relaxed the norms for CMDs yet again. EDs appointed a couple of months earlier were suddenly allowed to appear for interview for the CMD's job.

Most amazingly, even though many vacancies were not to occur before August 2014, well after the general elections, a highly proactive finance ministry under P Chidambaram decided to interview candidates in October-November 2013! What was the big hurry? Banking circles will tell you stories - of fixers and the going rate for appointments.

The interviews themselves are another farce. About 25-30 candidates are called in a single day. The selection panel interviews them for 10 to 15 minutes and asks very basic questions. The biggest travesty is that real banking experience does not count much. Multinational companies put their hotshot recruits from business schools, in the heat and dust of rural India. But bankers who have never worked in a branch have become CMDs of PSBs.

Will the new government be able to stop this mockery? If the Prime Minister's Office is vigilant, it may cut out the quid pro quo and corruption in the process. But that is just a start. The operations of many PSBs are so rotten that merely a clean process of selection (not necessarily a clean man) for the top job will not lead even to the minimal efficiency that PSBs must deliver. After all, PSBs control more than 70 per cent of vast Indian banking but are responsible for sapping tens of thousands of crores a year - either by not contributing by way of dividends or periodically getting capital injection from taxpayers' money.

If the Modi government really wants to play chowkidar it must impose accountability first. India's CEO-style prime minister may be shocked to know that the CMD of a PSB is neither judged by his leadership qualities nor by his profitability record. Have you ever heard any CMD being sacked by the bank board (which are anyway stuffed by political fixers) for poor performance?

Guess who evaluates the CMD currently? No one. Technically, the RBI is expected to do a performance analysis periodically and submit it to the finance ministry. But since the CMD's appointment itself is influenced by the finance ministry, the RBI does not bother.

But the bigger issue is this: is it even worthwhile for the Modi government to micromanage PSBs? PSBs, like other government-owned and -controlled firms, have been routinely abused by politicians at our expense. A well-meaning and super confident prime minister may feel that he can single-handedly make them more efficient, but that is not a policy reform. It would be dependent on the ability of one strongman. Surely, the prime minister cannot also repair the 200 plus other government companies, many government-funded "autonomous bodies" under various ministries and commissions that constitute the vast wasteland of a big state?

In fact, the prime minister had promised minimum government. If he is serious about this promise, he should set performance targets for PSBs, and seriously revamp bank boards, bringing in independent finance professionals. Having done this, he should make the top management, the board and the RBI fully accountable for performance. Through this hands-off approach, the PMO and the finance ministry will get much more out of PSBs, with much less effort.

The writer is the editor of

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First Published: Sun, November 02 2014. 21:44 IST