In the recent times there has been much talk about the Union finance ministry trying to micromanage the affairs of the public sector banks. D. Subbarao, and Y. V. Reddy, the current and past governors of the Reserve Bank of India (RBI), have argued for the majority owner—the Government of India (GOI)—to exercise its control over the banks through the board process rather than through notifications. In this context it is useful to understand the constitution of the public sector bank boards to look at this dynamic.
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Any expert on corporate governance will tell you that this is an ideal composition of a board that represents the owner, business, employee and societal interests. However, it is important to see how this plays out and why the ministry gets more than its share of importance.
The ministry gets undue importance because of the fragility of the executive positions on the board. The chairman is usually from some other bank and often takes a while to settle in and understand the culture of the bank. If they happen to be the chair of a small bank, then a major part of the time is spent in lobbying for a vacancy that might arise in a larger high-profile bank. If this is not in the reckoning, they look for ministry-related post-retirement assignments—a membership in the Securities and Exchange Board of India, a vigilance commissioner, a non-executive chairman’s post in one of the many banking sector institutions and so on. The executive directors look to move to the next bank as chairmen and are continuously search for “good” postings. Even the general managers who form the next layer of executive decision-making are vulnerable because they hunt for positions outside the bank as executive directors of other banks and the same set of considerations continue. Therefore, structurally the top executive management is designed not to stand up to the ministry even on merits. The top management also suffers from a horizon problem, where nobody can afford to think too far ahead in the brief tenures they get.
Many independent members on the board come in through lobbying in political circles (in the case of political appointees); and garnering of votes of the minority shareholders (such as the Life Insurance Corporation of India, the Unit Trust of India and other government controlled entities). While some of these directors turn out to be fine, principled, individuals, some of them just enjoy the perks of the position without much of an understanding of what banking is all about. The strong person on the board usually is the representative of RBI. Structurally he does not have a vested interest.
During Y. V. Reddy’s tenure RBI stopped sending serving officers to the boards of the banks. Reddy’s argument was that there is a conflict of interest when the supervisory function gets merged with the governance, even when he saw merits of the supervisory authority getting insights through convergence; he thought that there was still a conflict of interests. His solution was to appoint retired senior executives as RBI representatives. Subbarao has chosen to go back to the old practice of sending active executives on to the boards.
The activism of the ministry seems to arise from (apart from the current incumbent’s impatience to get on with work) its mistrust with the governance processes in the banks and a suspicion on the capability of the members of the board to look at issues from its merit. There might be a point in such activism if the ministry believes that the process of appointment of directors to the board itself is vitiated. But this only attacks the symptom rather than the disease. The ministry cannot claim helplessness in the appointment of board members. We are dealing with public deposits and larger economic interest than just running a bank. Therefore, it is essential that a fit-and-proper criteria is to be applied to all appointments on the boards of banks.
It is also useful to carefully examine the number of practising chartered accountants on the boards of the public sector banks—not only representing the position reserved for the profession, but other board positions. A close examination of how many of their associate companies are undertaking bank audits will reveal the vested interests playing out. The ministry needs to address these issues and strengthen the boards instead of issuing dictats on the promotion process, the level of wholesale deposits and whether self-help groups of poor women should get a term loan or a cash credit limit.
M S Sriram is a visiting faculty member at the Indian Institute of Management Bangalore
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