The NDA government has scrapped a list of eight names who were shortlisted by the UPA government to head public sector banks (PSBs). This means these banks are likely to remain headless for at least another three months. This is the minimum time it takes to fill up the posts — identifying eligible candidates, calling for applications, interviewing and finally getting the names cleared by the Central Vigilance Commission (CVC). An accelerated selection process announced by the Finance Ministry last week is unlikely to make much of a difference.
Inevitably, the business of these banks will suffer. The executive directors, who will be asked to officiate, cannot be expected to show the same kind of dynamism that the ‘permanent’ CMD exhibits or supposed to exhibit. It will be entirely normal for them to bid for time, and pass on the baton without rocking the boat. Who would like to take on a well-connected tycoon who has defaulted when all he has to do is warm his seats?
There is another fall-out from this episode. The bank executives, who were selected earlier and now dropped from the list, are not exactly duds. Besides, they have climbed that far to reach the position of EDs. However cynical one may be, most of them have merit of their own and their rise is not entirely due to politicking. And not to forget, all of them would have cleared hurdles, even stiff ones such as vigilance clearance. Wasn’t S. K. Jain cleared by the CVC before he became CMD of Syndicate Bank? Only to be caught, as the CBI alleges, of brazenly negotiating a bribe?
Opaque procedure
The government’s action creates uncertainty. If the selection procedure always lacked transparency, it has become even more opaque. The government has shown very little appreciation of the concerns of the PSBs. A mountain of bad loans confronts these banks. All of them have to raise huge amounts of capital to meet their international capital adequacy standards.
Headless organisations cannot provide the leadership, or, for that matter, accountability. On the government’s side, it is likely than an overburdened Finance Minister could not accord the attention the appointment of bank CMDs deserves. In any case, the present episode of vetoing names chosen by the previous government cannot be viewed in isolation from the reality of public sector banks and their governance.
Government ownership
Given the ownership structure of these banks, appointment or removal of their CEOs is the government’s prerogative. In all these banks, the government is the majority shareholder. There is every indication that the NDA government will not let its stake in any of these banks to below 51 per cent — the limit beyond which no PSB can dilute its shares.
There is, in fact, a political consensus that the ownership structure will remain so. Various legislations have sanctified this arrangement. Thus, despite some strong economic reasons to offload its stake, the government is unable to do so. The need to measure up to the new international norms of capital adequacy calls upon all banks to infuse substantially more capital. The obvious solution to dilute government stake and increase non-government holding is simply not acceptable.
At different points in time, various committees and expert groups had suggested bringing down government equity to below 51 per cent but at the same time retain their public sector character. The latter is meant to ensure furtherance of social objectives such as in the recent implementation of the massive financial inclusion programme, Jan-Dhan Yojana. The latest in a series of such expert groups, the one headed by P. J Nayak, a former Axis Bank head, recommended vesting of government shares with a holding company. The committee claimed that its recommendations will have the salutary effect of freeing these banks from day-to-day micro management by the government.
Will the new arrangement pave the way for a new breed of bank chiefs, who can be compensated adequately according to market rates and are not cowed down by government interference? Though for now a theoretical proposition, it is a tantalising thought. But alas the answer has to be in the negative for various reasons.
As it happens in the private sector too, the majority owner — the government — calls the shots in the PSBs, especially in matters such as top-level appointments. However, there is a way of selecting or removing the heads of institutions that you want to nurture. It is in that context one refers to the news item regarding dropping off names from the shortlist prepared by the previous government. The decision seems more akin to withdrawing governors selected by the UPA. But unlike in the case of governors, replacements have not yet been found. The travails of a PSB chief may actually begin with the appointment but that is another story. The point to note is that a bank chief’s travails are also those of the bank and its customers.
(This article first appeared in The Hindu dated Nov 3, 2014)