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Banks Board Bureau: Government yet to clear several proposals to boost performance of PSU banks

Suggestions include management revamp, risk management functions, performance linked sops.

Written by George Mathew | Mumbai | Updated: March 20, 2018 2:30:50 am

Banks Board Bureau, public sector banks, PSU banks, pnb fraud, bank fraud, nirav modi, mehul choksi, business newsThe Banks Board Bureau (BBB), created by the government to set governance standards and select top management of public sector banks two years ago, had proposed several changes, including revamping of management committee of the board, risk management functions, stock options and performance linked incentives to improve the performance of PSU banks which are hit by huge losses and bad loans, but the government is yet to approve many of these recommendations.

The Management Committee of the board (MCB) should be reconstituted with only whole-time dorectors who would undertake the management function of the Board. The MCB should be delegated any other functions which would not be in the form of supervisory functions of the Board, it proposed. Currently, credit underwriting decisions for large borrowers is undertaken by MCB which includes non-executive directors. “However, the recent episode of stressed asset build-up makes it evident, in varying degrees, that PSU banks have not derived full benefit from the collective experience, insight and diverse exposure that non-executive directors were thought to bring to bear while taking credit underwriting decisions for large borrowers,” BBB, headed by Vinod Rai, said in recommendations released on Monday.

“It could be argued that presence of non-executive directors on the MCB would dilute their ability to exercise supervisory oversight on the management function of the board,” BBB said.

The Risk Management Committee (RMC) of the board should be given the mandate to decide on the credit rating and credit exposure threshold matrix within which the MCB as well as various executive committees/individuals to undertake various credit underwriting decisions, BBB had proposed. Most PSU banks had reported huge losses in the December quarter.

It further said the Credit Approval Committee of the Board should be dispensed with. “The non-executive directors nominated/appointed by the Government on PSU banks boards may not fulfil the criteria of Independent Directors. Nevertheless, these non-executive directors be empowered to perform the role of Independent Directors,” BBB said. These recommendations were made on March 15, 2017. “The Bureau awaits latest updates from the DFS on the status of these recommendations,” it said. PSU banks are supervised and controlled by the Department of Financial Services (DFS) in the Finance Ministry.

The government also did not pay attention to the stressed asset resolution strategy of BBB. “The Bureau facilitated a meeting of the Chairman/CMDs/MD& CEO’s of PSBs with the Director, Central Bureau of Investigation and the Central Vigilance Commissioner. The meeting was co-chaired by the Governor, Reserve Bank of India along with the Chairman, Banks Board Bureau. However, since the Government had not acceded to the Bureau’s request for a specific mandate on stressed asset strategy, the Bureau stepped aside from making any further efforts in the matter,” it said.

According to BBB, since PSU banks operate in the same sector, the design of compensation based on performance should be similar across all PSU banks. “Since This will ensure consistency in adoption and at the same time ensure differentiation in compensation based on performance and paying capacity of each PSU banks,” it said, adding, “introduction of performance based compensation should be possible only for those employees above a certain level for whom a PSU bank chooses not to be part of the extant industry wide compensation determining process.”

For such employees, compensation should be made up of a fixed component and a variable component — both short term and long term. The short-term component should be in the form of Performance Linked Incentives (PLIs) which should initially be restricted to not more than 50 per cent of fixed component. “The long term variable component should be in the form of Employee Stock Options (ESOs),” it said,

“These recommendations were made by the Bureau on January 31, 2017. The Bureau awaits latest updates from the DFS on the status of these recommendations,” BBB said.

It said for the appointment of non-executive Chairmen (NEC) in PSU banks, there has been only a limited success. Significant challenges remain as reflected in the existing vacancies of not just the non-executive chairman but also non-executive/ non-official directors. In case of wholetime directors, the Bureau recommended that at least one Executive Director should be from within the organisation who should have exclusive oversight over the non-revenue generating functions of the PSBs so as to enhance the vigil on internal controls and risk management.

BBB seeks more mandates from govt

Mumbai: The Bank Board Burau (BBB) has sought several specific mandates from the government. For PSB consolidation, it wants to offer its advice to ensure that bank consolidation is least disruptive, minimise the reliance on the tax payers and maximise the outcomes for all stakeholders. It also proposed reworking the Articles of Association of IDBI Bank.

The Bureau said it will develop an independent perspective on asset quality and stressed asset resolution strategy that transcends business cycles as also possible way for concerted and co-ordinated effort among PSBs towards recovery and, more so, in the case of wilful defaulters.

It wants to engage with the PSU banks boards to help build capacity to attract, retain and nurture both talent and technology – the two key differentiators of business competencies in the days to come. It also proposed to present its quarterly assessment to the Finance Minister on the relative performance, the respective capital assessment and growth assessment of each bank.

It also sought mandate to put in place an arrangement for engagement of the Government with the board of PSU banks rather than direct engagement with the management. ENS

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