Empty chairs: Government should not delay board appointments at PSBs

The Reserve Bank of India (RBI) has issued draft “Governance Amendment Directions”, which, it says, are intended to improve how the boards of banks, including scheduled commercial banks, payments banks, small-finance banks, and local-area banks, operate. Earlier, specific prescriptive instructions had been provided, but the regulator believes that principle-based guidance is a better way to deal with issues of increasing complexity. These new norms are due to come into force later this year, after stakeholder consultations are taken into account. While this is an important step by the RBI to improve bank governance, it implies that the composition and capacity of bank boards is a crucial ingredient in it. And here, an issue arises: What happens if the boards simply do not have the required members? Under such circumstances, the guidance provided by the RBI, particularly as it is now designed around principles, may fail in its application.

 

Public-sector banks (PSBs) grapple with this aspect, largely due to the Union government’s delays in appointing board members, including chairpersons. The directions of the RBI draft stress the importance of the non-executive chairpersons’ role, since the board convenes under their direction and they play a crucial agenda-setting function. It is deeply concerning that a mere three of the 11 state-controlled banks have a non-executive chairperson at the moment. As this newspaper has reported, some of them have been missing this position for a considerable length of time. This is also true of other senior positions. Canara Bank, which is among the top PSBs, has not had a managing director, who also serves as chief executive officer, for nearly four months.

 

Even the boards themselves are shorthanded, aside from the failure to appoint chairpersons. Two of the 11 PSBs have only seven members on their board. The highest number of members that any of the nationalised banks’ boards has is 10, and only three of them do so. Of particular concern is that several also lack a director appointed in the category of chartered accountants. Such an appointment is required to ensure that the audit committee of the board, to which many vital duties are delegated, functions in accordance with the regulations. Most also lack the full complement of independent directors, making do with RBI and government nominees. This is a broader problem, of course. There is a shortage of independent directors in the private sector, even as various regulations have piled more and more duties on to those roles.

 

Over the years, the government has made significant intervention in institutionalising the appointment processes. But of late, action seems to have lagged. The fact is, with or without the RBI’s new directions, PSBs require a well-functioning, fully formed board. Without a proper audit committee, for instance, tasks of basic governance will remain unfulfilled. The bank board’s undercapacity problem will only increase with the shift to principle-based governance. The norms require boards to dedicate sufficient time to strategy and risk governance, but those that do not have their full strength and have few independent voices or financial expertise will wind up being unable to properly discharge these duties. This will eventually affect the performance of PSBs, with broader implications for the economy.