 "Splitting bank CMD posts before board empowerment is like putting cart before horse")
Even as the Government is contemplating changes in the top management of public sector banks, including separation of the posts of chairman and managing director, experts warn that going ahead with the plan without properly empowering bank boards could be like putting the cart before the horse.
Among those who have issued a note of caution are former Axis Bank chairman PJ Nayak, who headed a Reserve Bank of India (RBI) panel that originally recommended the separation of posts. The Nayak report had recommended separation of the two posts, but only at the end of a three-phase transition process to fully empower the boards.
“Such board empowerment requires several complementary measures to be taken. It is unclear as yet whether they will be (taken),” said Nayak in a response to Firstbiz. The Nayak committee submitted its report in May, 2014.
The three-stage transition process laid out by the Nayak committee report includes entrusting the selection of non-official directors to the Bank Boards Bureau (BBB), a body of former senior bankers, in the first phase.
In the second phase, the panel proposed restrictions on the tenure of directors, besides bringing in rules relating to a cooling off period for reappointments.
In the third phase, it asks RBI directors to step down from the boards of banks unless the bank is troubled. It is in this final phase that Nayak recommended a separation of the post of chairman and chief executive officer.
Among other recommendations, the Nayak panel had also recommended privatisation of government banks by cutting the government stake in these banks to less than 50 percent. Presently, India’s Rs 86,00,000 crore banking system is dominated by public sector banks, which account for more than 70 percent of the total industry assets.
The RBI is yet to accept the recommendations of the Nayak panel.
A financial services expert with a leading consultancy firm said the process of splitting the positions of chairman and managing director should be gradual, after empowering the bank boards. In the absence of a strong board, there are chances of political influences playing a part in the appointments of critical posts in public sector banks.
“The decision makes sense but in a gradual manner,” the official said on condition of anonymity, saying he advises some of the banks.None of the bankers Firstbiz spoke to wanted to be named saying the matter is sensitive.
In the event of a split in responsibilities, the current CMD post in state-run banks will be split to a non-executive chairman and an executive managing director (or CEO), who will spearhead the day to day management activities of the bank.
Currently, only in State Bank of India are there separate posts for chairman and managing director, but the SBI’s Chairman is an executive chairman. Private sector banks already have separate chairmen and MDs.
At Axis Bank, Nayak himself had resisted the idea of splitting the chairman and chief executive officer even though the RBI has been pushing for it.
Nayak resigned from the bank as chairman and CEO in April 2009, after dissenting over the appointment of Shikha Sharma as the new managing director and CEO of the bank. In 2004, Nayak had offered to resign when there was a demand for the separation of non-executive chairman and MD.
Though the RBI has been pushing for splitting the posts, the government, the owner of state-run banks, has been resisting the move saying the CMD in state-run banks doesn’t enjoy absolute powers.
In April 2014, the finance ministry wrote to the Reserve Bank saying it is not in favour of splitting the posts of public sector bank chiefs. In a communication to RBI Governor Raghuram Rajan, the government said “the board is headed by CMD (but that) does not mean that CMD enjoys absolute power and the board of the bank is subservient to CMD,” PTI reported on 8 April.
Taking a U-turn?
This time around, the government has been forced to make changes at the top management following the bribery allegation at Manipal-based Syndicate bank, where the chairman of the bank, SK Jain, was arrested by the CBI after he was allegedly caught taking bribes for extending undue credit facilities to some private firms.Whether the ministry has changed its mind on the subject with the arrival of the new government at the centre is yet to be seen.
A senior banker, who recently retired from a large state-run bank, said the decision to split the CMD post makes sense.
“Presently, there is some conflict of interest when the same person heads the board, which takes broader policy decisions, and the management, which implements the plans,” the banker said. He too declined to be named saying the matter is sensitive.