A Case Of Mixed Ethics At Mint Street

IN THE FINANCE ministry or the Reserve Bank of India, rules for banks are decided on the basis of their shareholders. In other words, parentage determines the rules for a particular bank.
True, this is not applicable for all banking operations. Stuff such as the mandatory liquidity ratios, provisioning norms and risk weightages for different asset classes are uniform for all banks. So are a host of other operational details. But the bullet starts biting when it comes to corporate governance norms. One of the areas with the widest divergence is the role and designation of chief executives and the selection of bank directors. Two recent examples highlight the discrepancy in bank governance norms.

First, the government recently asked all listed public sector banks to halve the number of shareholder directors and replace them with government-nominated ones. The second example is the recent public —and rather petulant —exchange between UTI Bank CMD PJ Nayak and RBI. Here’s the spat in short: The bank’s board wanted to re-appoint Mr Nayak as CMD, but RBI put its foot down and said the post had to be split into two — a chairman and a MD. At this point, Mr Nayak told the board that he would continue only as CMD, since “having spent 7.5 years as CMD, it would not be possible for him to function in a different and lesser capacity in the bank and he will, therefore, cease to be associated with the bank after July 31”. This was stated in an announcement to BSE.

The public airing of differences occurred because of the varying rules that exist for different banks. Take public sector banks first. The board composition of these banks is determined by the Banking (Nationalisation and Acquisition) Act, 1970 and 1980 — two archaic pieces of legislation that were drafted for a specific purpose at a particular period in time (mass-scale nationalisation of private banks in two tranches). The Act has undergone several amendments, but one feature remains unaltered: all PSU banks must be headed by a chairman-cum-MD. The only exception is State Bank of India, which is governed by its own Act. For a variety of curious reasons, the government, as the largest shareholder of PSU banks, and RBI (as regulator of banks) have refused to split the posts.

On the other hand, all private banks have to compulsorily appoint a non-executive chairman and an executive CEO or MD. There could be legal reasons for this — these banks are not governed by the antiquated Act mentioned above, but by the Banking Regulation Act. If you look at the boards of most new private sector banks, the chairmen are usually appointed in a non-executive capacity (and are mostly retired senior RBI officers) while the chief executive is the main executive for driving the bank’s growth.

The story is completely different with foreign banks. To start with, foreign banks are regarded as branches of their parent organisations. For example, American banks in India are usually branches of their parent organisations in the US. This peculiar structure is to make the parent liable for any big risk event here. The parent’s capital is then directly committed to the bank’s operations in India, which acts as a safety cushion. This also has a bearing on the board structure. Foreign banks, since they are not incorporated as legal entities, do not have a legal board. They are allowed only an advisory board, which is headed by a non-executive chairman, usually a senior retired bureaucrat.

RBI appointed two committees in recent times to take a look at corporate governance in banks and financial institutions. The first, headed by RH Patil, among other things said: “…any steps to improve corporate governance in the Indian economy would remain incomplete and half-hearted unless public sector units are also covered in this exercise”. The second panel, headed by former HLL chairman AS Ganguly, in fact, went a step further and noted, “It would be desirable to separate the office of chairman and managing director in respect of large-sized public sector banks. This functional separation will bring about more focus on strategy and vision as also the needed thrust in the operational functioning of the top management of the bank”.

However, despite suggestions and the evident infraction of ‘desirable’ governance norms, the government and RBI soldier on in their belief that the goose and the gander need separate sauces.


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