Why is it that governments do not learn from their own experiences? It appears that the more things change, the more they remain the same. Nothing typifies this more than the government’s recent efforts at reforming public sector banks. There is no effort to deal with the underlying malaise afflicting these banks. Instead, we witness tinkering with some symptoms that have been tried without much success in the past.
Earlier governments have tried to create an environment which encourages banks to be less risk averse with freedom to take prudent commercial decisions. Attempts were made to insulate them from intrusive oversight of agencies like the Central Bureau of Investigation (CBI) and the Central Vigilance Commission (CVC). Senior retired bankers were made members of the CVC so that vigilance watchdog agencies can better appreciate the nuances involved in commercial decision making. There were also moves to set up a Bank Frauds Bureau for pre-screening complaints of malfeasance before they are handed over to the CBI or CVC.
None of these worked. Senior managements of the banks whose appointing authority was the government were regular visitors to the finance ministry and were only too eager to please the powers that be. They were accountable to authorities who had little understanding of running banks. The boards of directors of banks were there in name only, as they had neither the knowledge nor the skills to contribute to the functioning of banks.
We are now witnessing a repetition of similar efforts. The newly created Banks Boards Bureau has become another entity to which banks report and it is advising banks on how to deal with non-performing assets (NPAs) and also on which banks should be merged, and so on. An external Oversight Committee has been set up, ostensibly with the objective of providing a buffer to banks from inquiries by the CVC or CBI in their decisions concerning settlement of NPA cases.
Have these systems and procedures succeeded in providing banks an environment that is conducive to cleaning up their balance sheets? The jury is still out. But this much is certain: Instead of strengthening the boards of these banks so that they become truly board-run companies, we are providing them with crutches which will further erode commercial decision making capacity and autonomy.
The government’s move for the merger of banks within the fraternity of public sector banks is another example of failure to learn from past mistakes. A merger of entities makes sense only if it leads to productivity and efficiency gains. It should not be a mere arithmetical merger of balance sheets. In the case of banks this means rationalisation of branch networks and rationalisation of staff to get a better skill mix.
In the past we have seen how the merger of the then New Bank of India with Punjab National Bank did not yield any of these benefits. Not one branch with overlapping jurisdiction was closed nor was any staff rationalisation done. Instead, senior managements were embroiled for years in HR issues of seniority, staff union issues, court cases and so on. It was a lesson in why such mergers do not make commercial sense.
We now hear an announcement by the government and the Bank Boards Bureau about the impending merger of some banks. One doesn’t know if any analysis of the costs and benefits of such mergers has been done. The only benefit that the government seems to have in mind is that a merger of better capitalised banks with undercapitalised banks may reduce the requirement of funds for capitalisation. This may make fiscal sense for the government but could be extremely harmful for the banks.
Some measures have recently been rolled out in a plan for governance reforms in public sector banks. The focus of the plan on depoliticising the process of making key appointments and on providing commercial autonomy is appropriate. Separating the positions of chairman and managing director is in line with accepted corporate governance practices. The Bank Boards Bureau has been given a role in the selection of chairmen, MDs and independent directors. Care will need to be taken that it is not burdened with supervisory and monitoring responsibilities. It should not become another port of call for the senior managements of these banks.
All these measures, however, may not count for much unless the government addresses some basic underlying factors that plague public sector banks. Most of the ills stem from the shackles of public ownership and the fact that these banks are creatures of a statute, the Bank Nationalisation Act. This Act places enormous governance responsibilities on the government, including the appointment of chairmen, CEOs, independent directors, wage structure, vigilance policies, hiring policies and so on.
We have a situation where the boards of directors of these banks have little role or responsibility, with the government calling the shots in most matters. A large proportion of the managerial cadre is manned by staff promoted from the clerical cadre. Many banks have not made direct recruitments to the management cadre for years. Furthermore, many qualified senior managers have left to join greener pastures in new private sector banks. It is no rocket science to figure out why the same managers are performing exceptionally well in a private sector work environment.
We do not see the government addressing some of these basic issues. Half-way measures such as creating a Bank Boards Bureau can work only if they are conceived as intermediate steps for creating a holding company for restructuring banks. They should not become another organ of oversight. A starting point for reform of public sector banks should be to make them creatures of Company Law, as all private sector banks are, by repealing the Bank Nationalisation Act. This change will enable the banks to function as board-run companies without any interference from the government, and also lead to better supervision and regulation by the Reserve Bank of India and greater accountability to the market. It will also create a framework for further structural reforms and dilution of government equity in these banks.
The writer is former secretary, economic affairs and banking, and former chairman, HDFC Bank
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
