Public sector banks and corporate governance

Synopsis: Issues that are hampering the performance of PSBs, consequences and the way forward.

What are the issues affecting the performance of PSBs?

Delay in appointments of CEO’s and MD’s of PSSBs: In the recent past, after the MD and CEO of Bank of Baroda stepped down, his successor took charge after 100 days. Whereas, in the case of Union Bank and Dena Bank, it took 264 days, 262 respectively.

Except for the Bank of Baroda, none of the 11 PSBs, in the group of nationalised banks, currently has a chairman (non-executive though).

Inadequate board of directors: Most of the nationalised banks do not have an adequate number of directors on their boards.

Under the Banking Companies (Acquisition and Transfer of Undertakings) Act, every government-owned bank should have whole-time directors (MD and CEO, and EDs). They are to be appointed by the central government after consultation with the Reserve Bank of India (RBI).

They should also have one director nominated by the central government and another, with the necessary expertise and experience in regulation or supervision of commercial banks, from the RBI.

Apart from this, there are directors who are experts in the field of agricultural and rural economy, banking, co-operation, economics, finance, law, small scale industry, and a chartered accountant. However, at least 60 such positions were vacant, at least for a few months.

Finally, representatives from shareholders as well as workmen and officers are supposed to be on such bank boards. At the moment, probably no PSB has any director from workmen or officer employees on its board.

Non parity in tenure of PSB chiefs and Private bank: A private bank can be run by a CEO till the person is 70 years old, whereas chief of a PSB have to step down at 60, barring the State Bank of India.

Non parity in salary of PSB chiefs and Private bank: PSB chief does not receive market-based salary. The annual earnings of a non-executive chairman of a PSB are capped at 10 lakh, inclusive of fees for attending board meetings. This is way below the compensation of the chairman of any private bank.

Other issues: These include the inability to directly recruit young talent from business schools because of various court judgments, the fear of investigative agencies, the L-1 formula that requires PSBs to buy everything, from tea to technology, from the lowest bidder, not the best one.

What are the negative consequences?

While the whole-time directors run a bank, others called non-official directors or NoDs (another name for independent directors) are critical in formulating strategies and ensuring governance.

In the absence of the required number of NoDs, many PSBs are not able to meet the quorum at the meetings of critical sub-committees of the board.

What is the way forward?

Implement the recommendations: More than a decade back, in June 2010, the finance ministry had appointed a committee on HR issues of PSBs.

It had made 105 recommendations on performance management, capability building and freedom for banks to increase variable compensation and offer stock options, among other things. The government accepted 56 of these recommendations, leaving out the key ones.

To improve the governance of PSB’s government needs to implement the recommendations made by the committee on HR in true spirit.

Source: This post is based on the article “Public sector banks and corporate governance? “published in Business Standard on 6th September 2021.