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.