About two years ago, when Rakesh Mohan came back from the finance ministry to the Reserve Bank of India as its deputy governor, the central bank had to appoint an architect to renovate the 18th floor of its headquarters on Mint Road in Mumbai so as to carve out a room for the fourth deputy governor.
Similar renovation work has been on at the headquarters of some of the large public sector banks of India to create space for their new executive directors (EDs). Traditionally, the public sector banks are run by a chairman-cum-managing director (CMD) at the top and one ED, reporting to the CMD. Six large public sector banks that have business over Rs1 trillion have just got one additional ED each. And a few more will have two EDs soon as their businesses are set to cross Rs1 trillion.
While shifting its headquarter from Ballad Pier in the heart of Mumbai to the Bandra Kurla Complex in the city’s suburbs a few years back, Bank of Baroda had created an extra room for the second executive director in anticipation of the government move. However, banks such as Punjab National Bank or Union Bank needed to create new office space on the floors where the chairman and the current executive director have their offices.
In more ways than one, the government move is welcome.
First, big banks will now have one more in-house board representative who understands the bank better than outsiders. Traditionally, a 13-member board has four bank representatives—the CMD, ED and one representative each from among the employees and the officers. Now, it will have five insiders as the new ED, too, is a board member. Second, the government will have a larger pool of EDs from which to select the head of a bank. Till recently, whenever the top position in a bank was vacant, the government had a pool of 19 EDs to look into but, now it has a pool of 25 EDs and this pool will grow as more banks get two EDs. Third, the two-ED formula at larger banks will create a faster growth path for senior bankers and some of the competent general managers who would have otherwise retired as general managers can now aspire to run a bank. Finally, appointment of two EDs will be of enormous help for banks at the operational level as three heads (CMD and two EDs) are always better than two heads (CMD and one ED) to run an organization.
This is, however, at a theoretical level. The real scene is very different.
The problem with the organizational structure of a public sector bank is that the role of an ED is not clearly defined. Except for the fact that an ED is an understudy of a chairman, nothing is defined about the job.
This is also illustrated by the fact that different banks are approaching the double-ED concept in different ways. For instance, Punjab National Bank has divided the role of two EDs across geography. Even though both of them will operate from the bank headquarters in Delhi, they will share the responsibility in overseeing the operations of 18 zones besides sharing the policy-related areas such as inspection, risk management and human resources. The Mumbai-based Bank of Baroda, in contrast, has divided the work of two EDs by allocating different divisions such as credit, resources, loan recovery, etc., to them. This is very different from what a private bank, say ICICI Bank Ltd, does. Until recently, two EDs of ICICI Bank had defined roles of managing the bank’s corporate and retail businesses.
Normally, general managers of a public sector bank report to the ED, and the ED reports to the CEO who is also chairman of the board. An ED can sanction a loan of up to Rs75 crore, while the CEO’s sanctioning power is higher, of up to Rs100 crore. Barring this, there is no clear-cut distinction between the role of a chairman and an ED. Both of them are appointed by the government and are members of the board. And whenever the chairman is away, the ED runs the bank.
The lack of clarity of the ED’s role often leads to complications as both the chairman and the ED feel that they are running the bank. I would prefer to call it saas-bahu or the mother-in-law-daughter-in-law syndrome. All chairmen were executive directors before getting the top job and most of the EDs (unless someone doesn’t have the required two years’ service left) retire as chairmen. And yet, rarely do they understand each other. So, EDs are often seen siding with other board members to scuttle the chairman’s proposal at the board and the chairman, on his part, feels tempted not to miss an opportunity to pull down general mangers who are perceived to be close to the ED. Of course, there are banks where both the ED and CEO work well together, but they are exceptions and not the norm.
The presence of two executive directors will not help in clearing the decades-old mutual mistrust between a public sector bank CEO and his deputy. In the new set-up, two EDs can join hands to make the life of their boss difficult or the chairman can play a divide-and-rule policy to keep the two deputies on a tighter leash. An additional ED will not in any way help a bank perform better. While floors are being renovated to accommodate an extra room for the new ED, the government needs to recast the role of an ED.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Email comments to firstname.lastname@example.org