Over ten months after the government conducted a banking conclave ‘Gyan Sangam’ to chalk out its strategy for public sector banks in early 2015 in Pune, the situation has hardly shown any improvement in terms of governance and performance with the government yet to implement many of the reforms announced earlier.
Four public sector banks — Indian Bank, UCO Bank, Andhra Bank and Bharatiya Mahila Bank — are functioning without a CEO and MD. Over half a dozen banks, including Oriental Bank of Commerce and Punjab National Bank are without a non-executive chairman. More than ten executive director posts are lying vacant in various PSU banks. Bank of Baroda, which is in the spotlight for an alleged Rs 3,500 crore illegal remittances fraud, got its full-time MD and CEO — PS Jayakumar — on October 13 after nearly 14 months. The appointment of MD for Life Insurance Corporation is also pending and the post of member (non-life) for insurance regulator IRDA is also lying vacant.
The PJ Nayak Committee on ‘Governance of Boards of Banks in India’ submitted its report on reforms in public sector banks 16 months ago. In August 2015, the government announced MDs for five PSU banks and a seven-point framework called ‘Indradhanush’ that included setting up a Bank Board Bureau (BBB) and a holding company.
Although the government agreed to set up the BBB as proposed by the Nayak committee — which would advise on top bank management selection — there’s no sign of creation of the much-talked about company. As the Bank Investment Company (BIC) would require time-consuming legislative changes, the panel had recommended that BBB should be set up by an executive order of the government and comprise of three bankers chosen from among those who are either serving or retired chairmen of banks.
Khushroo Panthaky, partner, Walker Chandiok & Co, said: “An important step here would be to ensure improvement in the quality of management and providing higher degree of autonomy to the management of PSU banks so that they can be operated more efficiently.” Governance strengthens with better functioning of risk management framework and it is imperative that the banks adopt corporate governance norms in substance and not just in form, he said.
The current practice is that the government sets up a selection committee, chaired by the RBI governor, and including, among others, the RBI deputy governor for banking and the secretary for financial services in the finance ministry. “The short listing of candidates is undertaken by the Department of Financial Services, with the RBI being unaware of the exercise,” Nayak panel said.
“The shortlisted candidates are called for interview, but the interviews are generally short, sometimes lasting less than five minutes for a candidate,” it says. Selected candidates are appointed through approval of the Appointments Committee of the Cabinet of the Government after vigilance clearance.
“The RBI and the Central government have their own nominees on the boards of PSU banks. MDs and EDs are appointed by the government. Still the regulator and the government are unable to clean up the mess in the system,” said a senior official of a private bank. “The only bank where things are going smoothly is SBI. The government appointed an MD for SBI last week even before the superannuation of the incumbent.”
The government had approached several private sector veterans in the previous round of MD selection, but got only a cold response from private sector veterans. However, experts say individuals who have the relevant experience of having managed private banks could be considered as independent directors on the PSU banks’ boards as they are the ones who can be more outspoken while questioning the management and thereby promote good governance framework. “Generally in PSU banks, it has been observed that there is a scope for improvement for ensuring higher standards of transparency and accountability,” Panthaky said.
RBI governor Raghuram Rajan had warned that a slow pace of reform could lead to greater, rather than lower risk residing in the banking system which is now plagued by high stressed assets. “For a country as big as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk,” Rajan wrote.
Rating firm Crisil said net interest income (NII) increased a mere 3.3 per cent year-on-year despite advances rising 6.7 per cent in the first quarter of 2015-16. The low growth was because of a substantial increase in non-interest earning assets and pricing pressure. Net profit declined 23.3 per cent, largely on account of a sharp increase in provisioning as the asset quality mix deteriorated (with more NPAs shifting from substandard category to doubtful and loss category).
Panthaky said one of the reasons is the inherent weaknesses in their process of disbursement of loans and advances. Credit appraisal of their customers is something that these banks need to improve on.