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Too Many Cooks Spoil the Broth

Thomas Franco
   Friday 19 May, 2017  

Three proposals from three agencies related to the banking sector have come under the spotlight in the media.  An MoU with the Department of Financial Services, GOI on a turnaround plan to justify infusion of new capital, signed by the managements of 11 banks, and Associations/Unions,  a note on a Governance, Reward and Accountability Framework (GRAF) dated April 13, 2017 prepared by the Bank Boards Bureau which does not have any statutory rights and RBI’s announcement of a revised Prompt Corrective Action (PCA) strategy.  All of them talk about revamping the Public Sector Banks (PSBs).  Only thing they do not say is that the policies pursued by the Finance Ministry, GoI and RBI are the root cause of the problem facing the PSBs.

The RBI's circular on the revised Prompt Corrective Action (PCA) claims to address capital, asset quality and profitability issues.

The BBB's note  on the GRAF has 5 themes.  They are Board composition and vacancies, Human Resources development, Investment in technology to reduce cost and enhance efficiency, Stressed Assets Management and Capital Assessment.  It also talks about a code of conduct and ethics, compensation reforms, relative performance rating, Extension/Termination of a whole time director etc.

The DFS drafted MoU also talks about capital, asset quality, NPAs, improvement in productivity, improvement in business process and HR policies and practices.

What is common in all of these is capital for the banks, Non Performing Assets, and governance and HR policies.

The Public Sector Banks have given back to the government many times the amount of capital the latter has invested in them.  The PSBs follow the policies prescribed and implement the schemes of the government.  During Nationalisation nobody spoke about profit but emphasised the need expansion, raising the credit-deposit ratio and banking for the common man. All of that has been achieved.

Dr. Soumya Kanti Ghosh, Chief Economist, SBI in an article in the Economic Times has estimated that PSBs have given the government a 300 per cent return by means of dividends and taxes.  But now in the name of capital there is an effort by the new triumvirate--the RBI, BBB and DFs-- to choke the PSBs.

If the second issue of NPAs that has been highlighted is resolved there won’t be any need for additional capital.  There are no clear efforts for recovery of NPAs.  NPAs rose because of the policies prescribed by the RBI and DFI.  Who is responsible? Who is accountable? Why are Parliament’s own standing committee recommendations ignored? The Standing Committee cites the following as reasons leading to NPAs:

“Main reasons for increase in NPAs of Banks, inter-alia, are sluggishness in the domestic growth during the recent past, slowdown in recovery in the global economy and continuing uncertainty in the global markets leading to lower exports of various products like textiles, engineering goods, leather, gems external factors including the ban in mining projects, delay in clearances affecting Power, Iron & Steel Sectors, volatility in prices of raw material and the shortage in availability of power which have impacted the operations in the Textiles, Iron & steel, Infrastructure sectors, delay in collection of receivables causing a strain on various infrastructure projects, aggressive lending by banks in past”.

Without solving these problems which are the root causes how can we find a solution to the NPA crisis.

The third issue of governance is again the creation of the RBI & DFS.  The Chairman, MDs & Directors are appointed by the Govt on the recommendations of the DFS.  For 2 years the Govt has not appointed any officer/ Employee Director in the PSBs.  There were many posts of MDs vacant for months.  Even now Directors' posts are vacant.  An RBI nominee is present in every board of the PSBs.  What was their role? A Finance Ministry representative is also present in every board.  Then who is responsible for poor governance?

The fourth issu raised is HR policies and practices.  PSBs have robust HR policies and practices evolved through a process after 1969.  They have the most committed staff whose work has been appreciated by the Prime Minister and Finance Minister.  But their compensation is inferior to that of the government and the private sector. Still they perform with utmost sincerity.  They opened 97 per cent of the Jan Dhan accounts.  They handled the demonetisation.  They have a time tested Bipartite Settlement system with the Indian Banks Association.

Surprisingly IBA is not involved in any of these exercises of the RBI, DFS & BBB.  It is a mute spectator.  The other stake holders are the officers and employees.  They are not involved in any consultations with the triumvirate inspite of repeated appeals.  Instead consultancies like Mckinsey and Boston Consulting are involved in the process in many ways in return for a huge bill, even though they do not have any practical experience.

Ignoring IBA, the Officers Associations and Employees Unions in any turn around plan will only result in failure.  Moreover, instead of giving functional autonomy to the banks with accountability, the creation of multiple monitors/regulators dictating terms without any co-ordination and at times at cross purposes does not augur well for the country.

The government would do well to first listen to the stake holders including banks customers

* Thomas Franco




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