Tuesday, June 26, 2007

Government directors on public sector banks

Unusual guts from the CMD of a public sector bank. Punjab and Sind bank CMD R P Singh has written to the finance ministry seeking the removal of five non-official directors on the board of the bank, reports ET.

The five directors have written to the PM making allegations of favouritism in the sanction of loans against Singh. Singh, in turn, says the directors have been trying to shield defaulters.

The larger issue is appointments of politicians or professionally unqualified people getting on to public sector bank (PSB) boards courtesy of their political connnections. I have nothing against politicians being on bank boards. There are politicians and politicians- and some are bright enough and capable enough to make a better contribution than the retired managers one sees on private and public corporation boards.

The issue here is one of politicians who lack the equipment to make a contribution. This is just not on. Given that almost every government appointment on the board is said to be personally cleared by the finance minister, this does not speak highly of the FM's commitment to the banks under his watch. The FM is constantly exhorting PSBs to do better. He meets bank chiefs and reviews their performance. He knows that PSBs have their job cut out competing with private and foreign banks. And yet he puts the wrong guys on their boards!

The government is free to appoint whoever it likes- provided they need strict eligibility criteria. The RBI has laid down such criteria. The Ashok Ganguly committee on corporate governance in PSBs also has something to say on the subject. But what do we do if the government chooses to ignore these? PSB top brass can't do much about this but I believe this is a fit matter for bank unions to raise. The Left, which swears by PSBs, should back the unions to the fullest on this.

Incidentally, Harman had a posted a query in response to one my posts on governance at IITs/ IIMs wherein I had said that a dominant shareholder is best placed to ensure governance. He asks: how does this not happen where government is the dominant shareholder in PSUs?

Well, one is presuming here that government is fully focused on commercial objectives; sadly, this does not happen all the time. But, also, think of what would happen if government were not doing some kind of monitoring. Who would PSU managers be accountable to? Their boards, you will say. And who would pick their boards? PSU managers! That is why I say: governance by the government may be bad, but getting government out without other players to monitor managers is worse.

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