Making government banks bankable-LiveMint Governance of public sector bank boards leaves a lot to be desired
Reserve Bank of India (RBI) governor Raghuram Rajan’s call to free public sector banks from government interference is not only timely but also rectifies the incorrect framing of debate in the wake of the P.J. Nayak committee report on the governance of state-run banks released last week. For the most part, the focus has been on the possible privatization of banks, but that misses the central thrust of the report. Among other observations describing how critical is the problem of non-performing assets (NPAs) in public sector banks (as against their private sector counterparts), the report presents a damning indictment of the way these banks are run. The meat of the report lies in its dissection of the way the board of directors in public sector banks govern these banks.
Two broad trends are visible.
One, in comparison with private sector bank boards, on average, public sector boards not only table far fewer issues but also deliberate on them in far lesser detail. Research shows that the number of issues discussed is positively correlated with a bank’s profitability and the number of risk-related issues discussed is negatively correlated with net NPAs (as a percentage of advances). Forget profits for a moment, even on development concerns such as financial inclusion, public sector banks appear to focus less than their private counterparts.
Two, the more worrisome aspect is that public sector banks boards do not discuss long-term strategy adequately. Instead their focus is tactical. In fact, “tactical” is a euphemism. Sample these amusing examples that abound in the minutes: “In one bank the taxi fare reimbursement policy gets the same coverage as the NPA recovery policy.” Other “tactical” concerns include “the details of a lecture by a bank’s CMD at a college; (the) extensive coverage of the finance minister’s visit to the bank”, and the “purchase of office premises at Bhopal”. Such issues are seldom deliberated in private sector board meetings.
Is it any surprise then that the public sector banks are lagging far behind their private peers in profitability, or are steadily losing market share to them or, worse yet, experiencing a rapid deterioration of asset quality? At this rate, the report estimates that government banks will need recapitalization of anywhere between Rs.2.10 trillion to Rs.5.87 trillion over the next four years. Given the government’s fiscal health and deceleration in economic growth, the time has come to address the fundamental concern with our public sector banks—the way they are governed.
The key shift that needs to be made is in the relationship of the government with the public sector banks. Till now, government control, especially through the finance ministry, has been complete with the banks being used to achieve objectives of state policy. This “government-as-sovereign” role has deeply politicized governance in these banks. Directors on the board are appointed either in keeping with anachronistic provisions of laws such as the Banking Regulations Act, 1949 or through political interference. As a result, disempowered boards are mostly bothered about keeping files in order and warding off queries under the Right to Information Act (RTI), and from the Central Vigilance Commissioner (CVC) and Central Bureau of Investigation (CBI) while their private peers thinks of ways to improve business.
To empower the boards and re-invigorate governance, the government must take a step back and look at itself as just an investor in public sector banks. One way to do this is to transfer the government’s equity stake to a Bank Investment Company (BIC) under the new Companies Act. The BIC will be charged with protecting the government’s investment, on the one hand, and improving the governance of the board by recruiting experts, on the other.
Internationally, there are several successful examples of such an arrangement—the Singapore government controls DBS Bank through the state-run investment company Temasek, and the UK government controls Royal Bank of Scotland and Lloyds through UK Financial Investments Ltd. But perhaps most instructive is the turnaround in the fortunes of Axis Bank within India. After being listed in 1998, it was only in 2003 that government’s investments were transferred to the Special Undertaking of the Unit Trust of India (SUUTI). The Bank’s Board chose its own CEO, set its own employee compensation bands, and was outside the jurisdiction of RTI, CVC or finance ministry. Since March 2003, Axis Bank’s share price has risen 32 times. In March this year, SUUTI sold 9% of bank’s equity stake for Rs.5,550 crore and guess who gained as an investor
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