Money & Banking
Talent deficit at the top: Some areas of concern in banking

Political appointments have the potential of bringing in people who carry with them their allegiance to New Delhi and thereby their vision being blurred while participating in policy decisions. Why can’t we have a pool of potential candidates for top posts?

Search for talent for top level appointments in family or industrial group controlled private sector establishments is becoming more and more transparent and open for candidates based on their curriculum vitae (CV) with focus on talent and experience. At the same time, the news about the delay in filling up of vacancies at the top in various public sector organisations including Reserve Bank of India (RBI) and a tendency to make compromise on selection of candidates for narrow considerations has opened up a debate in the media. The government and the organisations should take cognizance of this healthy debate and grab the opportunity to overhaul the top level human resources (HR) management to meet challenges posed by the changes caused by opening up of the economy and consequent play of market forces.

There were reports that one who was not found suitable for the deputy governor’s post at RBI was likely to be offered a position, which needs much more skill and qualification. The position was that of the director of Centre for Advanced Financial Research and Learning (CAFRAL), which will be having interaction of a higher level in international academic fora. Such compromises, even if it gives temporary relief to those who manage the show, do not send out healthy signals from HR management angle.

Even at this late hour, one expects, government of India (GOI) to evolve a rational and transparent policy by setting out norms for selection of candidates for top level appointments. These norms should be based on the needs of qualification, professional skill and expertise needed at the particular level, not only in RBI, but in other statutory organisations and public sector units (PSUs) including state-run banks. Both the GOI and RBI should ponder over possible reasons for talent not getting attracted to such appointments. The recent developments in RBI need a deeper look.

After a 1964 amendment to Section 8 of the Reserve Bank of India Act, 1934, the number of deputy governors at RBI was increased to four from three. Compared with other statutory bodies and PSUs (including state-run banks), the RBI has been lucky in getting the top level posts filled in time. The government has now moved into top gear to fill the vacancy that will be caused by the relinquishment of office by Dr KC Chakrabarty, deputy governor later this month, two months prior to the end of his tenure. This is particularly swift, though one would have preferred a long drawn and well thought out process, as in some Western countries, where the successor is identified months or even one to two years in advance.

As per reports in the media, a round of interviews has already been held, and some names have been recommended. Those interviewed include nine chairmen and managing directors (CMD) of nationalised banks, all of whom had been CMDs for one year or more. Names of two of these CMDs are also doing the rounds as the front runners for filling up the post. The entire exercise raises two questions.

The first is why is the pool of candidates for the fourth post of DG confined only to CMDs from nationalised banks and does not include a MD or deputy MD (DMD) from State Bank of India (SBI), the largest Indian lender? They generally have several years of experience in their post, and that too in many rich and varied spheres of banking activity, including as head of one of the associate banks or one of the numerous other subsidiaries. Moreover, the SBI is also a state-owned bank, and the level and quality of experience of an SBI MD or DMD are by no means inferior to that of any of the other CMDs of nationalised banks with an experience of one year or more. Does the answer lie in the fact that the Banking Division, which oversees the selection of DGs, is also a body created in the wake of nationalisation in 1970, and is therefore inherently biased towards this set of banks, however, inferior their overall individual performance may be.

There has, however, been an exception to the rule. Vepa Kamesam, who became DG in 2001 came from SBI where he was DMD. He was responsible for bringing in first rate changes to RBI’s currency management, especially in mechanising its work processes, and bringing about other sweeping changes, thus readying it to meet the complex challenges in currency management of a fast expanding economy.

The second and broader question is whether the Reserve Bank should continue to follow the present ‘reservation system’ for appointment of deputy governors? By convention and practice over the last two to three decades, two of the four statutory posts of deputy governors are filled by insiders, the other two going to an economist and a commercial banker, respectively. Sometimes, an odd civil servant like Dr YV Reddy doubled up as the economist DG, before rising to the post of governor. Civil servants from the Ministry of Finance like DR Mehta and RV Gupta also served as DGs in recent times, even though they were not economists.

In RBI, it is pertinent to note that successive governors, including Dr Vimal Jalan, Dr Reddy and D Subbarao chose, for long periods, not to give the portfolios of banking regulation and supervision to DGs coming from commercial banks. Though this need not be interpreted as a vote of no confidence in the entire rationale for having a DG from the commercial bank sector, the fact remains that governors were not sure whether field experience alone will make good supervisors/ regulators.

If lessons from international experience in recent times were to be a guide, the existence of “revolving doors” between the regulator and the regulated, at all levels, are a harbinger of financial wrongdoing and misdemeanours of various descriptions. One only needs to go through the voluminous reports and other material on the recent financial crisis to get an idea of the dangers of such arrangements. Were the decisions, not to give the portfolios of banking regulation and supervision to commercial bank DGs, yet another instance of tremendous foresight on behalf of these central bankers?

Going back a bit in history, the case of Amitav Ghosh (DG from 1982 to 1992) comes to mind. From being CMD of a middling Allahabad Bank, he was made DG of RBI for about ten years, the first posting in 1982 coming during the first tenure of Pranab Mukherjee as Finance Minister. If one were to go by the dissent note of KP Unnikrishnan in the joint Parliamentary Committee (JPC) report of 1992 that covered irregularities in government securities transactions, Ghosh was accused of being responsible not only for the “scam” but also for the deterioration in the quality of banking regulation and supervision over the ten years that he presided over the system.

Yet another instance was that of late SP Talwar, during whose tenure ten bank licences were given, of which only less than half the number are in the best of health, the rest having either wound up, merged or being under a cloud for some reason or the other.

The above instances point to the possibility that such political appointments have the potential of bringing in DGs who carry with them their allegiance to New Delhi and thereby their vision being blurred while participating in policy decisions. They could also result in having DGs who bring with them a baggage of biases and prejudices that could colour important regulatory and supervisory initiatives and decisions.

The present scenario calls for a re-look at the entire process of selection to such high level posts. There is a case for creating a pool of potential candidates for being considered for positions like executive director and upwards, irrespective of their hierarchical positions in the organizations they serve. Such an opening up of opportunities will help infuse talent and may change the age profile, leading to a situation where incumbents can be retained at the highest level for longer periods. It may be mentioned here that while average tenure of RBI governors has been less than five years, their counterparts in US and UK are serving for over a decade. In any case, the Old Lady of Mint Street needs to be spared the embarrassment of further damages to its reputation, perhaps the most valuable asset for any central bank in the world.

Needless to say, such review should have an open mind on the skill requirements, tenure and remuneration packages which have a significant role in attracting talent.

Some related issues

Heads of regulatory bodies in the financial sector have time and again expressed concern over the tightening grip of government on financial regulators, which interferes in the performance of their mandated functions in the recent past. Their voices deserve more attention from the stakeholders. Experts have been brushing aside these voices of distress, mainly on the ground that government being the ‘owner’ of the statutory bodies, has the absolute right to decide the contours of the manner in which they should function.

Ironically, this right of the government has never been in dispute. Objection from the regulators hover around the restrictions on the administrative, financial and functional independence of the statutory bodies within the mandated limits and interference in their application of mind. The political leadership, which is under a false notion that money can control everything, is in a mood to centralize all financial powers in the finance ministry. When this philosophy becomes the guiding factor, it affects all limbs of governance and the survival instinct makes the functionaries look up for guidance from above, in their day to day functioning. This does not augur well for the health of the economy.

Union government is preying on funds wherever they are available. This tendency is reflected in the transfer of funds from public sector institutions to Consolidated Fund of India under different pretexts. Such transfers, while not objectionable, if they are matched by appropriate budgeting keeping in view the nature of sources and uses, causes damage to the economy when resorted to in a casual way. For ensuring timely corrections in such matters also, continuity at the top of institutions like RBI is a must.

(MG Warrier is former general manager of Reserve Bank of India.)




3 years ago

What an article indeed! wish it is taken notice of by the authorities who matter


MG Warrier

In Reply to S.S.A.Zaidi 2 years ago

Thanks, Zaidi...One wonders why isues like tose raised in this article are not getting further discussed, despite the space provided for comment by moneylife...
Do I take that everyone agrees with the views here...


In Reply to MG Warrier 2 years ago

That's the lamentable state of affairs

Piramal group to exit from Vodafone India

Piramal group is selling its entire 11% stake in Vodafone India for Rs8,900 crore, thus earning a whopping profit of Rs3,036 in just over two years

Ajay Piramal-led Piramal group has decided to exit from Vodafone India Ltd by selling its entire stake at Rs1,960 per share.

In a statement, the group said, "Piramal Enterprises Ltd agreed to divest its entire stake, comprising 4.54 crore shares or about 11% in Vodafone India to Prime Metals Ltd, an indirect subsidiary of Vodafone Group Plc, for Rs8,900 crore".

Piramal group has bought these shares in two tranches during FY12 at an average price of Rs1,290 per share or about Rs5,864 crore.

Ajay Piramal, chairman of Piramal Group, said, “The equity purchase in Vodafone was consistent with our objective of making investments that offer opportunity to generate attractive long term return on equity. I am glad to say that we have delivered against our targeted returns with this investment”.

At 12.40pm Thursday, Piramal Enterprises was trading 6% higher at Rs568.6 on the BSE while the 30-share Sensex was marginally up at 22,759.


How IRS handles the dark money groups

Documents released by a House committee do shed some light on the inner workings of the IRS's Exempt Organizations division and how it approached applications of social welfare non-profits, also known as dark money groups because they spend money on elections without reporting their donors

A GOP-led House committee voted Wednesday to seek criminal charges against former Internal Revenue Service (IRS) official Lois Lerner, who used to run the IRS division in charge of tax-exempt groups. In a party-line vote, the committee accused Lerner of unfairly targeting the applications of conservative groups and misleading the Treasury inspector general, which was auditing the IRS based on allegations of bias against conservative groups.

Though the committee referred Lerner to the Justice Department for prosecution, it will likely have little practical effect, as the Justice Department is already investigating the Internal Revenue Service and Lerner. But the documents released by the committee do shed some light on the inner workings of the IRS's Exempt Organizations division and how it approached applications of social welfare non-profits, also known as dark money groups because they spend money on elections without reporting their donors. The influence of such groups has skyrocketed since the Supreme Court's 2010 Citizens United decision.
Here are the top five takeaways ProPublica found from the documents:

1. The IRS planned to deny the application of Crossroads GPS.

Crossroads GPS spent more than $90 million from unknown donors to elect conservatives in the 2010 and 2012 elections, far more than any other dark money group. By the beginning of 2013, the IRS was planning to deny the group's application, the documents show.

After applying to the IRS in September 2010, Crossroads started spending, and campaign-finance watchdogs started complaining. An IRS panel considered taking a deeper look at Crossroads twice — in November 2010 and June 2011 — but rejected the idea both times. One reviewer in November 2010 said that Crossroads was a "for-profit entity," a mistake Lerner later wrote that she found "most disturbing."

By June 2012, the IRS created a spreadsheet on Crossroads to analyze the group's TV ad costs and track whether the ads were political or issue advocacy. A description of the group's website in an IRS spreadsheet said it "appears to be an anti-Obama Administration website; however there are educational materials on site."

In late 2012, Crossroads' application was released to ProPublica in response to a public-records request — even though it wasn't supposed to be made public. The application showed that Crossroads told the IRS that its political spending "will be limited in amount."

The IRS received 25 referrals on Crossroads GPS between 2010 and 2012, the documents show — a referral is a complaint about a nonprofit, and can include a formal request for investigation or simply a news article.

On Jan. 2, 2013, an IRS spokeswoman, Michelle Eldridge, emailed Lerner and other IRS officials about questions from ProPublica over Crossroads' application. "I recommend that we just let this one sit and wait out the deadline," she wrote.

In an email two days later, Lerner wrote that she had read through allegations from campaign finance watchdogs about Crossroads, adding that they "were really damning."

By Jan. 9, 2013, the IRS was drafting a denial letter to Crossroads, the documents show. There was no more significant action until May 2, 2013, when a call was made to discuss the "draft denial letter."

Then on May 8, 2013, documents indicate that the IRS was also looking at "the draft denial of a similar case."

From May 13 until May 17, 2013, the IRS continued "working on draft of letter." By May 30, 2013, the first working draft of the denial was finished and sent for review.

But by that point, the IRS had come under scrutiny for revelations that it had targeted Tea Party groups for extra review. There's no proof that the letter to Crossroads was ever sent.

In an emailed statement Wednesday, Crossroads GPS President Steven Law said the group was still waiting to hear final action from the IRS on its application. Like the House Ways and Means Committee, Law accused Lerner of improperly singling out Crossroads for extra review.

"Crossroads GPS submitted its application to the IRS for formal recognition of its non-profit status when the group was formed in 2010," Law said. "It is now apparent that Ms. Lerner was directly and improperly involved in targeting our application, which may explain why we are still awaiting final action."

Meanwhile, Lerner's lawyer, William Taylor, said that Lerner had done nothing wrong. "She did not interfere with the rights of any organization to a tax exemption," he said in a statement.

2. The IRS also planned to deny the applications of other conservative groups that had spent on elections after telling the IRS they wouldn't do so.

Crossroads GPS wasn't the only dark money group facing denial before the IRS controversy blew up.

In response to a public-records request in late 2012, the IRS had also sent ProPublica the pending applications for five other conservative social welfare nonprofits that had told the IRS that they wouldn't spend money on politics but then did so. The groups were Americans for Responsible Leadership, Freedom Path, II, America Is Not Stupid and A Better America Now.

ProPublica wrote about the groups on Jan. 2, 2013. Nikole Flax, the chief of staff to the acting IRS commissioner at the time, forwarded the story to Lerner and two other IRS officials on the afternoon it was published in an email with the subject line, "latest article."

The same day, Lerner asked to set up a meeting to talk about the groups' applications.

The Ways and Means Committee found that four of the five groups had been subjected to heightened scrutiny, and three were audited, though it's not clear which ones. The IRS recognized both America Is Not Stupid and A Better America Now last year. Americans for Responsible Leadership was also recognized in October 2013 — despite spending almost $10 million on elections in 2012 and paying a record-breaking fine in California for violations of election laws.

In January 2013, Lerner also indicated more social welfare nonprofits would be denied. On Jan. 31, she emailed the chief of the IRS office of appeals, saying that in the next few months her office believed appeals would "get a lot of business" regarding denials of social welfare applications.

"I told them (the appeals group) this is a place where we have worked very hard to be consistent and have all our cases worked by one group, and suggested th ey (sic) might want to do something similar," Lerner wrote, adding that her office was being audited because of allegations of political bias in these cases. "If I were you, this is definitely something I'd want to be aware of and have a high level person overseeing and reporting regula rly (sic) to me. You were in TEGE (the Tax Exempt/Government Entities division) long enough to understand how dangerous what we do can be."

The documents included spreadsheets of the application status of various groups, including one providing aid in Pakistan and another trying to set up a medical marijuana dispensary as a charity. One spreadsheet indicated that a Tea Party group could be approved as a social welfare nonprofit but not as a charity.

But of all the groups listed in a 2011 spreadsheet as being flagged for review, only Emerge America and its affiliates ended up being denied. Those groups trained Democratic women to run for office.

3. The IRS really is not equipped to police elections — and knows it.

In the documents Wednesday, Lerner acknowledges how poorly the IRS monitors these groups, which are allowed to spend money on elections as long as they can justify they primarily work to benefit the community at large.

At one point, on Jan. 7, 2013, she wrote an email complaining that the IRS was not following up with groups that hadn't filed their tax returns, or Form 990s. She wrote that if the IRS only opened audits on groups that filed tax returns, "that's a big hole in the system."

"Then you have newspapers telling us what the orgs (sic) are doing, but we never look," she wrote. "If the org has been around log (sic) enough to owe us a 990 and they aren't filing to hide what they are alleged to have done, it should be our job to go out and get the 990 and then determine whether the allegations — that are very strong — are true."

"My level of confidence that we are equipped to do this work continues to be shaken," she wrote in another email. "I don't even know what to recommend to make this better."

Officials from two campaign-finance watchdog groups, Democracy 21 and the Campaign Legal Center, said Wednesday that they had met with Lerner and other IRS officials in early January 2013 over their allegations that several social welfare nonprofits, including a liberal group and a nonpartisan one, were overly political. They said Lerner refused to talk about individual taxpayers.

"We left the meeting extremely frustrated because neither Ms. Lerner nor her colleagues revealed anything," said Paul S. Ryan, senior counsel for the Campaign Legal Center. "I would use the word 'frustrated' in general in our attitude toward the IRS." He later added, "The IRS hasn't done anything" to enforce restrictions on political spending with these groups.

4. Most new liberal groups don't apply to the IRS.

Social welfare nonprofits don't have to be recognized by the IRS, because donations to them are not tax-deductible. They just have to incorporate as social welfare nonprofits in their state of choice.

Conservative groups typically have applied for recognition anyway, possibly because their donors want the IRS seal of approval.

One of the most active liberal dark money groups, Patriot Majority USA, has been recognized by the IRS. But other liberal groups have taken advantage of the loophole.
Often, they incorporate, never apply to the IRS, spend money on elections and then fold after filing a tax return or two.

The newly released documents show that one of the most prominent liberal dark money groups, Priorities USA, never applied to the IRS for recognition.

Liberal dark money groups have been much less active in elections than conservative ones since the Citizens United decision. About 85 percent of the anonymous money spent in 2010 and 2012 came from conservative groups. Priorities USA, despite being run by top liberal operatives, reported spending nothing on federal elections in 2012.

5. Lerner may have considered applying to work at a leading liberal social welfare nonprofit.

On Jan. 24, 2013, she emailed two senior IRS officials, asking if Organizing forAction — the nonprofit formed from the leftovers of President Barack Obama's campaign organization — had applied for IRS recognition.

One of the officials, Holly Paz, told Lerner she wasn't sure.

Another IRS official, Sharon Light, said she thought it likely that OFA would follow Priorities USA's path and not apply. "But maybe not," she added. She noted that while OFA would be run from Chicago, it would also have a Washington office.

"Oh — maybe I can get the DC office job!" Lerner emailed back.

It is unclear whether she was joking.



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