Mumbai: Chief executive officers (CEOs) of 28 public sector (PSU) banks have started counting the days for a quarterly ritual. No, I am not talking about the Reserve Bank of India’s (RBI) July review of the monetary policy. The PSU bank bosses are eagerly waiting for their meeting with finance minister P. Chidambaram in New Delhi on 1 August. Routine matters such as progress in disbursement of agriculture loans and education loans, and advances to small and medium enterprises are on the agenda of the meeting that will take place a day after RBI governor Y.V. Reddy presents the quarterly review of the monetary policy. This time, Chidambaram is also expected to lay down a roadmap for regional rural banks (RRBs). Last week, he announced a Rs1,850 crore rescue package for the ailing RRBs. The minister wants the PSU banks to play a more active role in running these RRBs, originally envisaged to be the lifeline of rural India when they came into being in 1975 under an Act of Parliament. The 1 August meeting will discuss the new role of PSU banks in reviving the RRBs.
However, bankers are more excited and anxious about the last item on the agenda—their performance appraisal. The finance minister’s meeting with PSU bank chiefs, as a ritual, is decades old, but their performance analysis is a relatively new concept, introduced by Chidambaram. He has also increased the frequency of such meetings—from annual and semi-annual events, they have become quarterly affairs. The performance of banks and their heads, however, comes under the scrutiny of the minister only once their balance sheets have been published. A non-performer does not lose his or her job, but runs the risk of losing reputation and public humiliation as Chidambaram discusses performances in the meeting where all other PSU bank CEOs are present.
Typically, such meetings run for three to four hours and are held either at Vigyan Bhavan, India’s premier conference centre in Delhi, or at a hotel. Besides the CEOs of 19 nationalized banks and State Bank of India, its seven associate banks and Industrial Development Bank of India, the chiefs of the National Bank for Agriculture and Rural Development and Small Industrial Development Bank of India and a deputy governor of RBI who looks after rural credit attend such meetings. The finance ministry is represented by the minister, the minister of state for finance and the bureaucrats of the banking division.
Bankers have no complaint, as such meetings keep them on their toes. “It gives us an opportunity to offer our point of views on various issues,” says the head of one large PSU bank who, for obvious reasons, would not like to be identified. He cites the instance of farm loans. Some time back, the ministry wanted PSU banks to double agriculture credit in two years. The bankers agreed, but at the same time, made a strong case for a 2% subsidy on such loans as disbursement of farm loans at low rates is not profitable to banks. “The finance minister appreciated our argument and a budgetary provision was made for such a subsidy,” he says. Another bank CEO says there is nothing wrong with the finance ministry holding such meetings, even though the government is not the sole owner of these banks. “Even in the UK, bankers are called in Parliament,” he points out.
How does the ministry judge the performance of CEOs? At the beginning of a fiscal year, each bank submits a statement of intent to the finance ministry on 16 major performance parameters, including deposits, advances, net profit, return on assets, return on net worth, earnings per share, capital adequacy ratio (CAR), net interest margin, cost income ratio, non-performing assets and advances to agriculture and small-scale industries. The targets are set in consultation with the boards of the banks.
In 2005-06, the first year when the performance appraisal system was put in place, five banks were able to meet their profit targets. They were: Indian Overseas Bank (IOB), Indian Bank, Canara Bank, Punjab & Sind Bank (P&SB) and State Bank of Hyderabad (SBH). IOB was the only bank which met all 16 targets, while Indian Bank and P&SB hit 15 each. Indian Bank fell short on CAR and P&SB on lending to farmers and small industries, known as “priority sector”.
Among other PSU banks, Canara Bank, SBH, and Bank of Baroda (BoB) met 11 of the 16 targets; Allahabad, Dena, Union and State Bank of India, eight; Andhra Bank and Bank of Maharashtra, seven; and so on.
Last year’s performers (and non-performers) will be known next month after the banking division makes its presentation at the closed-door meeting. Indeed, it’s a smart move by the government for making bankers accountable. But the process needs to be fine-tuned. The targets are set by the banks themselves. So, there is always a possibility of fixing modest targets and achieving them with ease. Neither the finance ministry nor the bank boards have the expertise and insight to judge whether the targets are soft or hard. An external agency can help the ministry set realistic targets that can challenge the CEOs.
Also, a three-hour meeting with half a dozen items on the agenda does not do justice to the bankers. The ministry must move out of the confines of Vigyan Bhavan and drive down to Shimla or Mussoorie and spend several days with the bankers explaining targets and achievements in a more relaxed manner. Finally, it must suggest ways to improve performance for those who do not deliver what they promise. This could range from offering voluntary retirement to a section of employees to showing the door to the CEO.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Please email comments to firstname.lastname@example.org