Business   

Can public sector banks be made more effective?

They follow Govt. rules while private banks are run on commercial lines

GOVERNMENT MANAGEMENT of business does lead, over time, to poor performance. Public sector banks (PSBs) are no exception. To appreciate the axiom, one can compare the performances of government-owned Indian (erstwhile Indian Airlines) and Jet Airways in the private sector. None had any idea — good or bad — about Jet Airways when it started operations in May 1993, but Indian was well known since 1953.

Indian was created by nationalising eight private airlines. Today, Jet claims, with justification, that it is the leading air carrier, with a 43 per cent share of the domestic market. One telling statistic is that Indian's fleet has come down from 99 in 1953 to 76 now. The airline offers a classic case study of how government management thoroughly weakens a commercial enterprise.

One wonders whether a similar fate awaits the PSBs, which are facing the stiffest competition from private sector banks that started operations around the mid-1990s. An attempt is made here to analyse the unbusiness like rules and regulations thrust upon PSBs by uncaring politicians and a thoughtless bureaucracy.

PSBs suffer governmental interference in their operations despite the proclamation in the UPA Government's Common Minimum Programme to the effect that they will be given managerial autonomy. While private sector banks run their affairs on commercial lines, PSBs are still asked to follow governmental procedures. To elucidate, three important areas relevant to healthy working of banks can be examined — tenure of CEOs, salary structures and scope for risk taking.

Short tenures

Most PSB chiefs have very short tenures in office as seniority is given undue importance in their selection. In the last 20 years, the ICICI group has had only two CEOs whereas the SBI group had, to this author's recollection, ten chiefs. Almost all other PSBs had 6 to 7 chiefs during the period. Internationally, persons occupying top positions in a big bank have a minimum 5-year tenure. This rule is never applied to Indian PSBs as the powers that operate the levers seem oblivious to international best practices.

One strange fallout of short tenure CEOs is that every new incumbent is eager to paint his/her predecessor in a poor light. If the profit dips during the year of change and then goes up the next year, the new chief claims credit for the improved performance, which can be due to accounting jugglery. Unless reasonable tenure of, say, five years, is assured, a CEO cannot make any worthwhile contribution to the growth of the organisation. For this, the retirement age for CEOs can be raised beyond 60. Earlier, when other officers of a PSB retired at 58, the CEO retired at 60.

Niggardly compensations

The total emoluments of the chairman of India's leading bank, State Bank of India, was Rs.5.30 lakh in 2004-05. For the same year, the gross emoluments of ICICI Bank's CEO were over Rs. 1.80 crore and the net, reportedly, over Rs. 1.30 crore. But then, the SBI group's balance sheet size was around Rs. 6,28,577 crore as compared to the ICICI group's Rs. 1,78,437 crore.

The net profits of the two were respectively Rs. 5,598 crore and Rs. 1,810 crore. Thus, for managing a banking business more than 3 times the size of its next competitor, the SBI chief gets a paltry 4 per cent of what his counterpart earns!

Such a huge difference cannot be seen in any other country. Incidentally, one of the managers in a private sector bank, aged 28, with five years' experience, had earned during 2004-05, gross and net emoluments of Rs. 56.29 lakh and Rs. 38.47 lakh, respectively.

Obviously, either the private sector banks pay very high salaries or the PSB salary structure is abysmally low, having regard to comparable responsibilities.

Such a comparatively poor structure is attributed to the belief that no PSB official can be paid more than a Secretary of the Union Government, irrespective of the nature of duties. The solution lies in either upgrading the salaries of government officers — Singapore, which the Finance Minister often cites approvingly, pays market related salaries to its government officers — or de-linking PSB salaries from government salaries. Another way of adequately compensating PSB officials is through employee stock option plans.

Little scope for risk taking

Risk taking is virtually frowned upon in PSBs because of the superimposition of government rules on banks. In banking, risk taking is inherent in lending as decisions are taken on one's view of the future; none can predict whether a borrower would repay in time or not. But, if a loan goes bad, only in PSBs and never in the new private banks, there is the presumption that the officer(s) who decided to lend should be held responsible and proceeded against by the bank. To examine the validity of such a presumption one must go into the business of lending.

A lending officer may take over a hundred lending decisions in a year and, by the natural process, some can go wrong. If all of his decisions prove right, it can mean one of two things: the officer is super human or took no decisions, passing the buck upwards or downwards! In fact, in U.S. banks, a 100 per cent record of good loans is considered a negative sign.

While in a government no financial loss is countenanced, in a commercial bank some individual loans will go sour. Banks prepare profit and loss accounts, recognising that loss is part of business, whereas no government prepares such an account. And, the tragedy is that the lending decisions are examined post mortem by government officers, sitting in the Central Vigilance Commission if the PSB officer is senior enough and if the case is labelled as a "vigilance'' case. (These examiners have no experience in business, let alone banking, nor do they have a judicial background). Any case where there is a loss is a vigilance case. One will not come across such a dispensation in any other country.

While faulty decisions should be enquired into and wrong doers punished it should be ensured that the procedures are proper. All major losses should be examined with a view to learning therefrom and avoiding repetition of mistakes. In no case should each decision of a lending officer be called into question at a later date.

A better system would be to examine the officer's track record over one year and, if the majority of the decisions was above board, there should be no further questioning. If the record is not up to the mark, the officer's ability and/or integrity should be looked into and appropriate action taken. If he/she is incompetent but honest, no vigilance enquiry should be undertaken; the officer can be given a change of job or trained more to become efficient.

All the above glaring weaknesses of PSB vis-a-vis private sector banks are known for a long time. Only, the powers that be appear to be blissfully ignorant. A crisis will certainly shake the establishment out of its complacency. A crisis in 1992 brought a swift response from the then Finance Minister Manmohan Singh who appointed an expert committee under M. Narasimham. This committee, inter alia, ushered in the income recognition and asset classification norms, by which Indian banks were gradually brought on a par with international banks in their accounting policies. This also flushed out the latent weaknesses in banks and cleansed the system thoroughly.

Will the present Finance Minister, under the leadership of the Prime Minister, appoint another expert committee to examine the drawbacks of governmental micro management of PSBs and give them true autonomy before it becomes too late?

R. VISWANATHAN

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