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A paper tiger called Banks Board Bureau

LiveMint logoLiveMint 26-02-2017 Tamal Bandyopadhyay

On 17 February, Sunil Mehta, a former country head of AIG in India, and T.C.A. Ranganathan, former chairman-cum-managing director of Exim Bank, were appointed non-executive chairmen of Punjab National Bank and Indian Overseas Bank (IOB), respectively. The Banks Board Bureau had recommended both.

This should have made the Bureau chairman Vinod Rai and its members Anil K. Khandelwal, H.N. Sinor and Roopa Kudva happy. One would have expected its latest meeting in Mumbai last week to be full of excitement. However, I presume that wasn’t the case. These four bring to the table unique skills and expertise and huge experience, but they could be a frustrated bunch as they cannot do what they want to do.

Rai, a former finance secretary, was also India’s chief auditor. Khandelwal, an HR expert, headed Bank of Baroda; Sinor, a former joint managing director of ICICI Bank Ltd, headed two national lobbies of banks and mutual funds; and Kudva, a former managing director of rating company Crisil Ltd heads Omidyar Network India Advisors, a US-based philanthropic investment firm.

Along with the two chairmen, the government also cleared the names of nine executive directors in public sector banks (PSBs). In at least one case, one general manager whom the Bureau had recommended for the executive director’s post in a Kolkata-based bank, got his posting at a bank in Mumbai.

Clearly, the Bureau can recommend names, but when it comes to the postings of top executives, it doesn’t have the final say. Even its recommendations are not sacrosanct. Last year, the Bureau had identified Mukesh Kumar Jain, an executive director of Punjab and Sind Bank, to head IOB. It was cleared by the Vigilance Commission but Jain didn’t get the job as a finance ministry division was not comfortable with the choice. The appointment was referred to the department of personnel and training; once again, the Vigilance Commission cleared it after a forensic audit, but the ministry has not cleared it as yet. IOB, with one-third of its loan book being stressed, has been without a regular managing director and CEO for many months now. Its last MD and CEO R. Koteeswaran retired on June 30, 2016. IOB’s executive director R. Subramania Kumar has been holding the charge of MD and CEO since November.

Instead of taking the Bureau’s recommendations seriously and referring them to the appointments committee of the Cabinet for approval, they are all scrutinized de novo by the finance ministry.

Apart from the selection and appointment of board of directors in PSBs, the Bureau is also mandated to advise the government on extension of tenure and termination of services of the board of directors. However, when Sushil Muhnot, a former chairman and managing director of Bank of Maharashtra, was fired in September 2016—four days ahead of his scheduled retirement— for allegedly occupying two houses, the Bureau was not consulted.

Even these could be minor irritants. The bigger problem is it doesn’t have any say on the resolution of stressed assets, consolidation among the PSBs, their governance and charting out the roadmap for a banking investment company as was envisaged by the P.J. Nayak Committee. The report of the committee which reviewed the governance of boards of banks in India mooted the idea of the Bureau. The government has accepted that, but the big names are probably being used to lend credibility to a platform, which supposedly drives reforms in India’s public sector banking industry while in reality, they don’t have much on their plate.

The Bharatiya Janata Party (BJP)-led government started the work of reforming India’s PSBs, which roughly have 70% market share in banking assets, with real earnest by holding the first-of-its-kind offsite with the bank bosses, Gyan Sangam, in Pune in January 2015. According to Prime Minister Narendra Modi, it’s a “unique initiative” and “the first step towards catalyzing transformation”. Subsequently, in August 2015, finance minister Arun Jaitley announced the grand Indradhanush plan which, among other things, promised to address issues such as high-level appointments, capitalization, stress in the system, and accountability and governance in government-owned banks.

The Bureau’s first meeting took place on 8 April, 2016 at the fourth floor of the Reserve Bank of India (RBI) office at Byculla, a neighbourhood of South Mumbai that houses the Bureau. After the meeting, former finance minister of state Jayant Sinha tweeted, “Excellent discussions at the Banks Board Bureau meeting today!” tagging two photographs—one of ribbon cutting by him with Rai, Sinor, Khandelwal, and the other showing all of them plus Kudva and former RBI governor Raghuram Rajan sitting on sofas and deputy governors R. Gandhi and S.S. Mundra standing behind. Gandhi was an ex officio member of the Bureau till recently when another deputy governor N. S. Vishwanathan replaced him. The other two ex officio members are the secretary, department of financial services, in the ministry of finance; and secretary, department of public enterprises.

In June 2016, the RBI released norms for a ‘Scheme for Sustainable Structuring of Stressed Assets’ or S4A for bad loan resolution and a critical component of that is an overseeing committee, recommended by the Bureau. Around the same time, there was also a meeting of bankers, members of the Bureau, the Central Vigilance Commission and the Central Bureau of Investigation, to discuss resolution of stressed assets. The meeting was hosted by the RBI but it was the Bureau’s idea. Ahead of that, the Bureau wrote to the finance ministry, seeking a revision in its mandate and suggesting that it should focus on resolution of stressed assets, consolidation, capital raising of PSBs and address the governance issues. The ministry, as is its wont, responded in November, keeping the mandate unchanged. Rai, who had been vocal on these issues at various fora, has stopped talking on these since then.

Its mandate remains the selection and appointment of managing directors and CEOs as well as non-executive chairmen of PSBs, helping banks develop a robust leadership succession plan for critical positions, advising the government on the formulation and enforcement of a code of conduct and ethics for bank executives, and helping banks develop business strategies and capital raising plans, among others. Barring the top-level appointments, all other terms of references are vague, and even for appointments, the Bureau does not have the final say and the relationship with the finance ministry division—which has its representative on the Bureau—is rather adversarial.

The Bureau also doesn’t have any role in choosing the so-called non-official directors at boards of PSBs who typically constitute one-third of the directors on any PSB board and most are political appointments. For instance, two BJP leaders— Bharat Dangar and Gopal Krishna Agarwal—are currently on the board of Bank of Baroda, even as both the non-executive chairman and managing director and CEO of the bank have been picked up from the market to professionalize it. Of course, Dangar adorns the board not as the 56th mayor of the city of Vadodara and a senior BJP leader, but as an assistant professor in the faculty of technology and engineering of the M.S. University of Baroda. Similarly, Agarwal is a chartered accountant. The attendance of most non-official directors and even some of the government nominees at board meetings is extremely poor. 

Incidentally, one large public sector bank has four chartered accountants on its board and another, a larger one, did not have a single chartered accountant till recently and it was finding it difficult to hold meetings of its audit committee which is typically headed by a chartered accountant.

After much persuasion, the Bureau could convince the government to agree to compensate the non-executive chairman of PSBs but the amount is capped at Rs10 lakh, inclusive of fees for attending board meetings. This is not comparable with what the chairman of a private bank gets.

In its efforts to stay relevant, the Bureau has recently sent a proposal to the finance ministry overhauling the compensation package for the executives of PSBs. The proposal includes stock options, performance-related bonus and fast-track promotion policy, among others. One would need to see how long the government takes to act on it, if at all.

If the government has any reform agenda for the public sector banking system, laden with bad assets and starved of capital, talent and governance, the Bureau could be an ideal vehicle to drive it. If it doesn’t, the Bureau will become increasingly irrelevant. Anyway, none of the members seems to know how long their own tenure will be!

Another way of looking at it could be the members of the Bureau have taken themselves more seriously than they should have.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.

His Twitter handle is @tamalbandyo

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