Through most of the last two decades, there was one near-certainty whenever public sector banks declared their results. It was this. If there was a new Chairman and Managing Director (CMD), then it was very likely that profits would nosedive in the immediately following quarter. Bank analysts dubbed it the ‘New CMD syndrome’.
The logic went like this. When a new man came in, he wanted to show the mess he had inherited. That would place whatever he did in his tenure, in the realm of the ‘heroic’.
So, as soon he took over, there would be quicker recognition of bad loans, a hike in provisioning coverage, cost-cutting exercises, cancellation of previous extravaganzas and contracts ordered by the earlier incumbent. Profits would fall in the short run. In about two years time (the average tenure of CMDs), it would be time for him to retire and he would have taken profits to a new high. Of course, the next man would do unto the bank what he had done two years earlier – carefully wipe out the stains and rewrite another chapter.
The cycle would repeat all over again – a kind of short-term ‘pralaya’ if you will, to wipe the slate clean. The impact on staff morale, credibility of the numbers and the people can be imagined. As for shareholder wealth accretion, it remained a non-starter.
Private banks lead
In contrast, private sector banks had it good. The top-brass had stability of tenure – usually appointed for a period of five years, and often renewed almost automatically for another term barring illness or death. The last two decades was also a growth phase.
An average of 20 per cent growth in all key parameters (business volumes, profits) etc was de riguer . Combine this profitability record with the lack of legacy issues (no baggage of old non-performing loans or militant labour to deal with) as well as an embrace of the then new technologies (ATMs, core banking, internet / mobile banking), and it was easy to see why private sector banks were stealing a march over public sector banks.
The cream of the business was going to them and public sector banks began losing market share. They were still kept afloat no doubt – thanks to sovereign guarantee, as well as a bit of customer loyalty and customer inertia.
The wheel has now turned a full circle. Private banks have gained respectable size in terms of business volumes and distribution network. And now they are beginning to see the flip side of size as their operations grow bigger and perhaps even unwieldy with many related diversifications.
The demands on the time of top leadership as well as management capacity are probably beginning to tell on them. A slowdown in the economy and larger exposures to the more troubled sectors have begun to weigh in on their performance, too.
And in a rather ironic twist, ICICI Bank, the second-largest private bank in the country, declared its first quarterly loss in nearly two decades last Friday. There were some mitigating circumstances, of course.
This unusual loss was attributable to higher provisioning for loans given to companies, which are currently under the Insolvency and Bankruptcy Code (IBC) proceedings as well as the bank choosing to take a hit on its treasury losses at one go, rather than spreading it out over the whole year.
But what caught the eye was that the bank chose to take this hit in the same quarter when its MD & CEO Chanda Kochhar was sent on leave till the probe on allegations of impropriety are completed. It may well have been a coincidence, but if you take out that possibility, then it is quite reminiscent of what used to happen all along with every change of guard at the helm in public sector banks.
CEO mortality
Perhaps the era of long tenures of the top-brass in private banks is coming to an end.
CEO mortality is going to be decidedly higher in future. Gloomy as that may sound, it may not be such a bad thing after all. There may even be some good in it. Looking at public sector banks, one is tempted to think they may have been in much worse shape today, if there had not been the periodic cleansing of the Augean stables .
What looked like a crippling blow then, may well turn out to be a blessing in disguise in future. Shareholders of private and public sector banks must see the lessons that the past offers.