Tuesday, January 06, 2015

Gyan Sangam

I return to my blog after a long lay-off, thanks to a rather hectic schedule. I'm hoping I will be more regular in the New Year and hoping also that this does not go the way of most New Year resolutions.

Well, I was over in Pune for the Gyan Sangam, a conclave of bankers organised by the finance ministry. I was there as an external expert on one of the six working groups. McKinsey was the 'knowledge partner' for the event. They made a presentation to kick off the proceedings and there was a director who coordinated our group's discussions.

We met at around 4:00 pm and carried on till nearly 8:30 pm. After a break for dinner, the bankers in our group re-assembled to arrive at a consensus on the recommendations. This went on for another two hours. So, you see, this was not the usual talk shop.

Indeed, I was pleasantly surprised at how constructive and intense the discussions were. My group dealt with Risk Profiling and Recovery. After a few rounds of discussions, we were asked to put down on a sheet of paper actions that we wanted of bankers and actions we wanted of policy makers. The final recommendations emerged from the points written on these sheets. Even if a few of our recommendations get implemented, I believe they would make a sea change to risk management in public sector banks.

That said, I am awaiting clarity from the government on a couple of issues. First, does the government wish to retain the " public sector character" of banks (that is, a stake of 51 per cent or more) as the FM promised in his budget last year? Two, does the government expect PSBs to perform a social role or is it happy for them to pursue profit?

The second point is especially important as there was a lot of talk at the Sangam on the gap in performance that had opened up between private banks and PSBs. If PSBs could steer clear of, say, infrastructure and SMEs, the gap would begin to close. But will the government allow it? I doubt very much. In his speech, the PM exhorted banks to shun lazy banking and take more risks in lending. That doesn't sound like a focus on profit alone.

Leaving aside the details on a host of matters including risk management, the government needs to do two things: fix management and fix governance. Fixing management means getting the right people at the top through a rigorous selection process. It's a scandal that this has been neglected for decades now. One CMD mentioned at the meeting that his interview had last all of 12 minutes. It took a 12 minute interview to put a man in charge of some Rs 500,000 crore worth of assets. It's not just the politicians and bureaucrats who are to blame but also the RBI. The RBI governor is represented on the committee to appoint CMDs and EDs of PSBs.

We also need to end the game of musical chairs at PSBs. An ED at a middle size or big bank hops on to a small bank as CMD. He whiles away a couple of years with his eyes focused on a CMD position at a bigger bank. From Indian Overseas Bank, he might leap across to Bank of Baroda. What commitment can we expect of EDs and CMDs who don't expect to be in their jobs for more than a couple of years? What risk management is possible in such a dispensation? Enough of this. If the government is serious, it must insist on succession planning from within for the posts of ED and CMD except in rare cases. It's hard to see how a CMD can deliver performance without having gained an understanding of the culture, systems and processes of  bank over a period of time.

The next thing to do is to fix governance. The government's idea is to split the post of chairman and MD. This has the potential to create two power centres in a PSB. The chairman will exercise power without having any responsibility. The MD will have to get things done with a chairman who may engage in back-seat driving. We have to see how this goes- I have my doubts.

It's true the CMD is all-powerful in the present scheme of things. But the answer is not to split the post but to strengthen the boards with independent directors and also with well-training government and RBI directors. We need a proper selection process for independent directors- perhaps, these appointments are best done by an independent Appointments Committee.

The RBI needs to do its best for both management and governance. It must specify fixed terms for the CMD. And it must lay down stringent 'fit and proper' criteria for independent directors with the right to reject nominations that fail to meet these criteria.

I don't see thinking along these lines. At the Gyan Sangam, there was much talk about a Bank Investment Company, a holding company for all PSBs which was proposed by the P J Nayak committee. Such a holding company would be the ultimate nightmare. It would be unwise to entrust the entire set of 26 PSBs to any set of professionals, however eminent.

The government needs to make up its mind on PSB autonomy. If it wants PSBs to run autonomously, it can ensure that within the existing framework. By the same token, setting up a holding company does not ensure autonomy. Alas, there is no set of professionals, however eminent, that is not amenable to government influence. That's the reality of India today.




5 comments:

shishir sharma said...

Comments
“My group dealt with Risk Profiling and Recovery. …actions we wanted of bankers and actions we wanted of policy makers. The final recommendations emerged …………Even if a few of our recommendations get implemented, I believe they would make a sea change to risk management in public sector banks. (What were the recommendations? an elaboration might be more useful to reader pl.).
“I am awaiting clarity from the government on a couple of issues. First, does the government wish to retain the "public sector character" of banks (that is, a stake of 51 per cent or more) as the FM promised in his budget last year? Two, does the government expect PSBs to perform a social role or is it happy for them to pursue profit? (Answer to First is already given by Prof in second part of his same question, and regarding second there shouldn’t be any doubt about the primacy of social role of PSBs since these were nationalized and expanded and nurtured. The issue is to make these more sustainable while carrying out their primary duties in a professional manner through good governance and management practices (as many of the other variables are external to it). Needless to say, since profit is one of the more acceptable criterion for assessing the efficiency and might show some signs for sustainable operations, the efforts have to be more focused towards changing internal organisational environment which might be easy. Regarding external variables, the creation of an enabling environment is already there as might be seen from the non-interference of the finance ministry in the handling of monetary policy by RBI. Prof has rightly pointed out about that “Leaving aside the details on a host of matters including risk management, the government needs to do two things: fix management and fix governance”.

chandramouli said...

Dear Professor,
1. “Gyan Sangam” – I initially thought it was something to do with spiritualism or something like “Gita Gyan Yagna”.
2. You have not specified what were your group’s recommendations on “Risk Profiling & Recovery”. Hence, we are unable to say anything on your belief that if they get implemented that would make a sea change to risk management in PSBs.
3. There is a social angle to funding and this can only be expected from PSBs and not from PvSBs. The Govt has to retain the “Public Sector Character” of PSBs and that is what has been reiterated by FMand PM.
4. The gap in performance between PSBs and PvSBs is bound to exist due to the social angle.
5. To fix management and governance has been discussed at length in numerous seminars and gatherings in the past and the same has once again been discussed at Sangam. One has to really understand why this has not fructified into any concrete actions and results? Is the problem that we are discussing at various forums itself is defective incapable of being resolved in view of our existing systems?
6. Succession planning from within will work only if there is a apt recruitment and training mechanism in place within the organization. Performance evaluation and accountability is missing of top PSB officials and hence there is an absence of commitment.
7. CMD post can certainly be split into C and MD. The functions of both offices are different and clearly defined in the statutes. I do not envisage any back-seat driving by Chairman and that task is normally done by the Govt. itself.
8. I agree with you that Bank Investment Company for all PSBs would be the ultimate nightmare. But here the idea was to raise funds for capitalization of banks and not otherwise.
9. If there is a social angle autonomy of PSBs cannot be achieved. We cannot evaluate PSBs from a private sector angle. This have to be viewed practically from the point of view of prevalent system. Any idea to bring out fast reforms will put the existing system into a disarray.
Chandramouli

T T Ram Mohan said...

Thanks Shishir and Chandramouli. I am not sure I am at liberty to share the recommendations of our group. In any case, only select recommendations of all six working groups were presented to the PM.

Let me just mention one proposal we made, return to consortium financing for loans above a certain threshold, say, Rs 500 crore. It's well known that had lenders had a consolidated view of borrowings of infrastructure companies, they would not be in so much trouble today.

As for fixing management and governance, the problem has entirely been one of lack of political will.

TTR

chandramouli said...

Dear Professor,
In the 80s when I was doing my CA all huge loans were financed by a consortium only. I do not know how this concept changed. Your group's suggestion is a welcome one to spread the risk esp. in infrastructure funding to mitigate the present troubles.
Chandramouli.

Shishir Sharma said...

uureg consortium financing like chandramouliji. i am also reminded of my student yrs of mastr in indl eco and then mba in begjnnig of eighties when i made studies on turnaround strategies of sick industries as well as banks. now i find a new definition of risk from current banking qeverywhere but more so in india. actually my being involved in dev bankg fr agrl dev and rural poor kept me away frm big ticket lending scene and also forced me to again go into academic area to find solution for increasig access. now that pm has through his jan dhan and aadhar impetus has achieved the access issue, now i tried to understand the now fashionable term risk of bankers. if i am permitted to say so. the risk could be eSily be defined frm comparing the consorium finacing being done by indian banks 30-40 years back and now. and the major factor is the presence or absence of sufficient collateral taken from the unit already sick, weak or potentially sick . i might not be saying anything new but i am sure both of u might appreciate still could help little somewhere to the policy maker who r rightfully taking vudance frm u. sirs i feel this is not a financial or accounting problem and that is why it ihas been eluding solution but a development problem which is multidisciplinary in nature. regards