The 2013 appointment of S.K. Jain, the suspended chairman and managing director (CMD) of Syndicate Bank, “lacked transparency and smacks of unfair practices,” The Indian Express reported on 11 August.
The cat is finally out of the bag.
The biggest bane of public sector banks in India that account for roughly 70% of the industry, is the opaque appointment process of the top bosses. There is hardly any norm there; most appointments are based on discretion of the bureaucrats involved in the process with the Reserve Bank of India deciding to look the other way.
Should an executive be first made the CMD of a relatively small bank and then move on to head a bigger bank? Or, should the person be straightaway made the boss of a large bank?
Can a banker who has spent close to three decades in a small bank be suddenly catapulted to the corner room of a very large bank?
Or, should he be chosen to head a small bank because of his background?
Nobody knows the answers to these questions. Rules are made and broken on the whims and fancies of a few in North Block that houses the finance ministry that appoints top bankers. Often, a short-list of successful candidates is made up to a year ahead of vacancies being created. This leads to intense lobbying where individuals and industrial houses are involved.
Nothing comes for free. So, the industrial house which lobbies hard to get its candidate the plum post demands its pound of flesh in the form of loans and the banker has no option but to oblige. An executive director of a large South India-based bank told me that he received a call from somebody he did not know promising to fix his appointment a few days before he was appear for an interview for a CMD slot. “To be fair to him, he didn’t demand anything, but I didn’t want it this way,” this person said. He faced the interview board but did not make it.
Many appointments of CMDs and executive directors are a result of lobbying. That’s one aspect . The other is that the process itself is rotten. There have been instances where an executive director becomes the chief after spending only a few months at a bank. There is no clarity even on how many years of residual service is required to become the boss of a bank. The norm is two years but there have been instances where CMDs have been appointed for one and a half years.
A senior banker, who headed two banks, says the entire system is rotten.
It starts innocuously.
A farmer who has been sanctioned a loan gives a junior agriculture officer a watermelon.
As the officer progresses in career, the offerings become costlier.
A chief manager gets a 2gm gold coin on Diwali while a general manager gets a 50gm gold coin.
There is a very thin line between a bribe and a gift. A box of Alphonso mango in April (when Alphonsos are sold at Rs.1,600 a dozen), a gold coin or dry fruits in silver bowls on Diwali, an expensive saree or a diamond earring for the banker’s wife on New Year—are these gifts or bribes? It’s difficult to classify them but I understand that officers’ manuals in some banks prescribe what a banker can accept and what he cannot.
Globally, different entities adopt different approaches towards gifts. For instance, an executive of the US Federal Reserve will never accept an invitation for dinner while a Financial Services Authority (FSA) executive in the UK will attend the dinner and send a “thank you” note the following day. Bankers would do well to deal transparently and put all such items that they are accepting on record the way FSA executives do.
Transparency is the key. Apart from lack of expertise in skill, risk management and credit monitoring, public sector banks are non-transparent in dealing with loan accounts and there are no set norms for who can get loans and who cannot, the pricing of loans, even the nature and quantum of collaterals.
The deputy general manager of a bank, based in Kolkata, told me that his bank doesn’t appraise a loan proposal and assess how much money should be given to the borrower. “We do the reverse. We first assess and decide how much money we should give and then do a mock appraisal,” he says.
Norms for collateral are typically there for small loans. “How authentic are the stocks and receivables audits? And often we give loans against fake book debts,” he adds.
There are many occasions when a fresh loan is given to enable a borrower to service the interest cost of a loan already given. The cycle goes on till the borrower crumbles under the burden of debt and fails to service it. In that sense, the banks are riding a tiger for many accounts.
The investigative agencies are selective on whom they go after. Jain was caught taking bribe for extending fresh loans to Bhushan Steel Ltd but the company already has an exposure of Rs.40,000 crore to various banks and is on the verge of default. What about other banks that have loaned money to Bhushan Steel?
Similarly, IDBI Bank Ltd is under the scanner of Central Bureau of Investigation for giving loans to Vijay Mallya’s grounded airline Kingfisher Airlines Ltd. Many other banks too had given loans to Kingfisher and a consortium of banks, led by the State Bank of India, even restructured loans by converting part of debt into equity at an unbelievably high price.
Has any of them been taken to task?
In November 2010, banks in the consortium converted Rs.1,355 crore of debt into equity, at a 61.6% premium to the market price of Kingfisher Airlines’ stock. Apart from this, the bankers also stretched the period of repayment of loans to nine years with a two-year moratorium, cut the interest rates, and sanctioned a fresh loan.
Brokers, some of them firms, also play a big role in this game of bribing bankers to facilitate loans for their corporate clients. One such broker syndicated Rs.50,000 crore worth of loans between 2008 and 2011 across sectors till it was caught while bribing bankers. Typically, broker fees are 2% of the loan amount sanctioned but this could vary depending on the sector. For instance, a real estate company may have to pay as much as 5% to get a loan sanctioned as banks are not willing to take exposure to this sector.
On top of that, if the price of the loan is lower than what a borrower expects, the broker gets a cut. And they share their booty with bankers. Such brokers literally carry money in suitcases to distribute. One individual broker owns seven flats in Mumbai and its suburbs where senior bankers are regularly entertained and another uses a helicopter for meeting bankers in different cities and closing deals.
There are other ways of pleasing bankers. One media company was looking for a Rs.800 crore loan from a bank whose CMD was on the verge of retirement. It simply bought a flat in UK where the banker’s son is based, spending £8,00,000 or about Rs.8 crore. It was a win-win for both the sides as otherwise, the media company would have needed to spend at least 2% or Rs.16 crore to get the deal done through a broker.
There are retired public sector bank chiefs who live in large flats in posh areas in Mumbai. Does their income justify ownership of such properties or is there a builder-banker nexus? I don’t know the answer. Offering apartments at a highly discounted rates could be a builder’s way of influencing a commercial banker.
Similarly, there are financial intermediaries who influence central bankers by offering lucrative jobs to their children. Here too it is difficult to prove any mala fide intention. One way of tackling this could be making disclosures mandatory. Regulators overseas do this.
How do we deal with corrupt bankers? To start with, split the top position in public sector banks between chairman and managing director. Right now, too much power is confined to one person and not everyone knows how to handle absolute power. The chairman can keep a check on the misuse of power. Also, the MD should start with a two or three-year stint that can be renewed. The corrupt ones should not get their term renewed and face the risk of termination even before the expiry of first term.
Raise the salaries of public sector bank chiefs manifold but don’t offer them the entire package in hand. There should be a clawback clause and a portion of the salary should be given two years after the chief’s retirement—once it is clear that bad assets haven’t swelled after the person’s departure.
Finally, the boards must be restructured. Currently, instead of giving vision and strategic inputs some board members are facilitators for unworthy borrowers. This practice must be stopped.
Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.
To read the first part, click here