The Hindu : Business : Managerial autonomy in PSBs illusory?

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Monday, Sep 06, 2004

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Managerial autonomy in PSBs illusory?

Public sector banks have all the potential to be world beaters provided they are given managerial autonomy and areas such as selection of top people, staff remuneration and staff accountability receive urgent attention, says R. Viswanathan.

"PUBLIC SECTOR banks will be given full managerial autonomy,'' proclaims the National Common Minimum Programme of the ruling alliance at the Centre. A laudable goal but one has doubts as to how far the Government is serious about vesting such authority in the managements of PSBs. When the Government does not appear prepared to give autonomy even to the regulator of banks, the Reserve Bank, the scepticism is bound to grow.

In his recent budget speech, the Finance Minister said, "I propose to - ...allow banks with strong risk management systems greater latitude in their exposures to the capital market.'' He went on to add that the RBI "will announce the necessary measures in respect of these matters'' (He was also referring to a slew of measures to be announced by the Seccurities and Exchange Board of India).

Mr. Chidambaram was referring to the present ceiling of 5 per cent prescribed by the RBI for capital market exposures by banks. Whether any increase in such ceiling is justified or not can be debated, but what is questionable is whether the Finance Ministry should be taking these decisions. The RBI, being the central bank of the country, is responsible, inter alia, for the financial health of the banking system. In no major country in the free world, does the government of the day direct the central bank about the guidelines that the latter should issue to banks from time to time.

While the Minister and the mandarins of the Finance Ministry might have felt that the above relaxation would improve sentiment in the capital (stock) markets, inclusion of the matter in the budget speech does send the wrong signals. The next time a foreign investment banker wants unreasonably large sums of money for his speculative forays in the Indian capital markets, he/she knows whom to approach. Not the lending bank nor its top management, nor the RBI, but the officials in the Finance Ministry.

Coming to the PSBs, they certainly will be much better off with more managerial autonomy. That they seem to fare poorly in comparison with the private sector banks, more particularly the newer ones such as ICICI Bank and HDFC Bank, has been acknowledged by even top officials of the RBI. In a speech at an annual international seminar at the World Bank in Washington, in June, Kishori J. Udeshi, Deputy Governor of RBI, had stated, "The private sector banks, especially the new ones, are world class,'' as reported in the RBI Bulletin of July 2004. What she perhaps left unsaid was that the public sector banks are not world class. To make them on a par with the best in the world, a lot of things need to be done and managerial autonomy will be on top of the wish list.

Say in top posts

For giving greater autonomy, three broad areas have to be addressed immediately. They are the manner of selection of the top management, the levels of salary and perquisites and the convoluted `accountability' policy. The chairmen and managing/executive directors of PSBs are selected by a committee comprising government and RBI nominees and are finally approved by the Prime Minister. One striking feature in this process is that the board of directors has absolutely no say in these appointments. This may be acceptable in banks where the Government is the sole owner, but in many PSBs the public has a large ownership, going up to over 40 per cent as in State Bank of India.

In these days when corporate governance is the buzz word, Indian PSBs may be the only entities where the board is not even consulted in the appointment of top people. In most PSBs, barring State Bank, the two top people are transplanted from another bank, which might have been a fierce competitor of the bank concerned. Further, the whole atmosphere is shrouded in secrecy with needless apprehension in the mind of the new incumbent.

Cases are not rare where the person, within a few hours of the appointment order, goes to the nearest branch of the bank and proclaims that he/she had taken over charge of the bank!! Possibly, if there is even a lapse of one or two days, the fear is that someone else could usurp the position. This only goes to show that the whole exercise needs to be decentralised and, as far as possible, the top people should be drawn from the same bank. And, the board of directors ought to have a say in the selection of the candidates.

Wide pay disparities

In salary and emoluments, the PSBs are way below the private banks. The chief executive of State Bank must be earning 20 to 25 per cent of what his counterpart in ICICI Bank is earning; SBI is much larger in size than ICICI Bank. Many a senior officer of PSBs have their children working in new private banks. The children, with just 3 or 4 years service, will be earning more than the parent, who has a meritorious record of 30 years in the PSB and is shouldering far greater responsibilities than the children.

There is a recent case where the parsimonious treatment meted out to officials of PSBs went to ridiculous lengths. A subsidiary of a big PSB is operating in the capital markets and its staff are drawn from the leading management institutes and the parent bank. The bank executives man the senior positions.

When the subsidiary had to make a presentation to an important client outside headquarters, the team comprised a senior from the parent bank and two junior officers who were direct recruits of the subsidiary. The juniors, as per the rules, stayed in a star hotel, whereas the leader of the team had to make do with a non -descript hotel.

One reason that is offered for the abysmal emoluments in PSBs is that the chairman cannot get more than what the top civil servant in the country gets and hence every one down the line is poorly paid. The answer to this argument is that the civil servants also ought to be paid better and at the same time any errant behaviour (such as corruption) should be severely dealt with. If the PSBs were to compete globally, the anomaly of low salaries needs to be removed. Staff accountability and the so-called `vigilance' setup in PSBs need to be overhauled. A bureaucratic mentality is entrenched in the powers that be and every instance of loss to a PSB is, as per policy, put through microscopic scrutiny to see if any member of the staff was responsible. Banking is a business and risk taking is part of a banker's job.

The policy forced on PSBs by the Government makes taking risk, that can result in a loss, a `criminal' offence, that is, the action needs to be punished irrespective of the overall performance of the official.

Thus, if an officer had granted 100 loans and one of them became bad due to external factors, he/she can still be punished. Indian PSBs are perhaps the only major group of commercial banks in the world which pursue such a policy. Very often the PSB officers feel that it is better not to take a decision and grant a loan than grant it and run the risk of punishment if something goes wrong. Thus inaction is superior to action!!

To add to the woes of PSB officers, their actions are examined post mortem, after a few years, by government officers from the Central Vigilance Commission (CVC), who might not have taken any lending decision in their entire career. While it is acknowledged by many that the present CVC has a top bureaucrat and a retired bank chairman, who are quite understanding and sympathetic, the fact remains that the system is patently unbusiness like. Recently, the CVC, on a representation by the Indian Banks Association, decided that only `vigilance' cases (where an officer is suspected or alleged to have acted for an improper or corrupt purpose) in which a very senior officer of Scale V and above (instead of Scale III and above) is involved be referred to the CVC, as mentioned in the RBI Governor's annual policy statement for 2004-05.

Persecution complex

However, the fact that every lending decision can be questioned after many years and the lending officers punished, has brought about a culture of total risk aversion among PSBs. This has been commented upon even by the World Bank. One is reminded of the earlier Licence Raj, where if an industrial unit produced more than its capacity and even if the goods were in great demand, the Government can punish it for exceeding licensed capacity! When this was found to be counter productive, the then Finance Minister (Dr. Manmohan Singh) did not raise the minimum size for a licence but totally abolished licensing. And, posterity would record that the production in industry zoomed after that single decision.

Similarly, the crying need is that the actions of bank officers should not be subjected to government rules that positively discourage financial risk taking. Will the Finance Minister order a revisiting of `vigilance' rules in PSBs so that they have a level playing field with the private sector banks and are enabled to take normal business risks?

To conclude, PSBs have all the potential to be world beaters provided they are given managerial autonomy and areas such as selection of top people, staff remuneration and staff accountability receive urgent attention. One only hopes that managerial autonomy does not become another slogan like the famous `Garibi Hato' coined a few decades ago by the then government and has to this day remained a mirage.

(The author is former Deputy Managing Director,State Bank of India).

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