RBI chief rues corporate governance deficit in public sector banks. Is there no remedy?

The RBI should look at converting the PSBs into limited companies and take steps to amend the laws to make them more accountable to the public shareholders and comply with the listing guidelines, both in letter and spirit

In a frank admission of corporate governance deficit in public sector bank (PSBs), Reserve Bank of India (RBI) governor, Dr D Subbarao, made a couple of very thoughtful remarks at a function organised to celebrate the completion of 30 years of National Bank for Agriculture and Rural Development (NABARD), a few days back. He expressed his disapproval to the manner in which directions were issued by the finance ministry to PSBs and suggested that the government should exercise its ownership rights through proper channels—the boards of respective banks.

“There are questions about how the government will play out its ownership role. This is not restricted to NABARD, it is something which is being played out in a number of institutions including the commercial banks.” Dr Subbarao said.                 

The governor further remarked, “Occasionally, there are concerns over the government exercising its ownership rights not through the established channel which is the board mechanism, but outside the board. I do not think that this is a good example of good corporate governance. The best thing for the government could be to show exemplary behaviour of corporate governance and exercise their ownership rights through the board. I think that would be good for all financial institutions including NABARD” he said.
In a recent diktat to the PSBs, the finance ministry had given a direction that every bank should ensure that no more than 15% of deposits should comprise of bulk and certificate of deposits. This had not gone well with the banks, as it interfered with their asset-liability management, more so when liquidity was tight and they had to resort to bulk deposits to maintain their liquidity position in good order.

Now that the governor has voiced his concern, RBI should initiate following steps to improve standards of governance in all PSBs, giving a new orientation to their functioning.

With a view to improve corporate governance in private sector banks, the RBI had introduced a policy of bifurcation of the post of chairman and CEO and has implemented this policy firmly in all the private banks for nearly the last five years. Despite opposition from Dr PJ Nayak, the then chairman & CEO of UTI Bank (now Axis Bank) the RBI did not relent and Dr Nayak had to relinquish his post as no exception could be made for this change. The policy of having a part-time non-executive chairman and a full time managing director-cum-CEO, duly approved by the RBI, has not only served to improve the functioning of banks’ boards, but has also helped in creating a healthy environment for a free and frank discussions on the banks’ functioning, thereby strengthening the hands of independent directors in private banks considerably.

Besides, RBI has been meticulously following a policy of not allowing the promoter of the private bank to be its chairman, but permitting appointment of only an independent professional to head a bank as its non-executive chairman which, in effect, has helped in ensuring the independence of the board from the clutches of the promoters.
But none of these policies and principles has been applied in the case of nationalised banks, and it is not known why RBI has not been able to convince the finance ministry so far.

In fact, on 23rd August 2011, the media reported that the RBI governor had said that he favoured bifurcation of the posts of chairman and managing director in state-run banks also, saying the experience of such a split in the private sector has been satisfactory.
He had further said, “Given our own positive experience, as well as the global endorsement for this position of separation of these posts, we will discuss this issue with the government. This experience proves to be positive in the private sector banks in our country, which has also been proved to be value-adding in international banks. Not giving too much powers to one person is good”.

The RBI had constituted a committee under the chairmanship of AS Ganguly in 2005 to study the issue of bifurcation of the posts of chairman and managing director of banks, and the committee had recommended such a move. This was implemented in the private sector in 2007. But the same could not be introduced in PSBs so far, for want of positive response from the finance ministry.

In public sector banks, barring State Bank of India and its subsidiaries, the position of chairman and managing director continues to be in the hands of a single individual who, by virtue of being both the chairman of the board and the CEO of the bank, would be able to influence the functioning of the bank according to his/her whim.

There is, therefore, a need for change in the present composition of the boards by splitting the post of chairman and managing director in nationalised banks as well. The RBI should have the unfettered authority to appoint a thorough professional as the non-executive chairman of every PSB. The central bank should, however, ensure that this is not meant to be a back-door entry for politicians to enter the banks, but an opportunity to cleanse the system and create an independent professional board for every bank. This could substantially improve corporate governance at the board level, thus helping to prevent unethical practices and unwarranted interferences in the operations of the PSBs.

The other most important reform required to improve corporate governance in PSBs is to restructure these banks to ‘limited’ companies and thus bring them under the ambit of the Companies Act. Since the days of nationalisation of these banks, much water has flowed under the bridge and many changes have taken place in corporate India. When they were nationalised, they came to be fully owned by the central government (the rules of the game then were different as they had no public shareholding). The government has disinvested a substantial part of the capital of these banks to the public, whose share holding has now crossed more than 40% on an average. This is likely to reach 49% in the next few years as banks will require fresh capital from the market in order to successfully comply with the Basel III guidelines.  

Due to the large public holding in these banks, they should now be answerable to the large body of public shareholders. But the annual general meetings held by the PSBs these days, are a farce, as the ordinary public shareholders have virtually no role to play in such meetings. They are merely silent spectators. A substantial amount spent on these meetings every year is a waste of public money, serving no useful purpose.  

The RBI should, therefore, initiate a debate on this subject of converting the PSBs into limited companies and elicit the views of the public and foreign institutional investors, who have substantial stake in these banks. Based on the feedback received the RBI should take steps to amend the laws to create an appropriate corporate structure for these banks to make them more accountable to the public shareholders and comply with the listing guidelines, both in letter and spirit. This will also create a level playing field for the public as well as private banks and improve corporate governance standards across the board in the banking industry considerably.

RBI as the regulator of the banking sector has to play its developmental role proactively to ensure that the banking institutions in our country grow on healthy lines.

(The author is banking analyst. He writes for Moneylife under the pen-name ‘Gurpur’.)

1 decade ago
Corporate Governance says about transparency,efficiency and disclosure. But it does not says to ruin the bank in the name of false competition with another PSU Bank , who is of the same group.
Hence Ministry is doing the right thing. We support it.
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