Public sector bank chief appointments: Why the rot runs a lot deeper

Ranjit Sinha, the director at the Central Bureau of Investigation (CBI), has struck the right note in questioning the appointment process of chairmen in many public sector banks, besides Syndicate bank.

Sinha confirmed that post the Syndicate bank-scandal, the agency has expanded its probe into the appointments done in other state-run banks since it has found out major irregularities in the processes followed.

A detailed probe in to the appointments in state-run banks could result in more skeletons tumbling out of the closet, for sure.

S K Jain, former chairman and managing director of Syndicate Bank was arrested by CBI sleuths early this month after Jain was caught red-handed accepting bribe from a few private firms in exchange of extending credit facilities.

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Besides Jain, CBI has also arrested executives at private firms in connection with the incident.
The arrest of Syndicate Bank chairman and managing director (CMD) and few others for accepting bribes in exchange of extending undue favours to certain companies in connection with loan sanctioning throws open a big question.

Why do only executives of public sector banks and government run-entities fall prey to the evil of bribery again and again?

Jain isn’t the first chairman of a PSU bank getting arrested in a bribery case or for violation of norms. In 1991, the sleuths had arrested K M Margabandhu, CMD of Uco Bank, in connection with the Harshad Mehta scam. He was later sacked. In another case, some ten years back, a former chairman of a Maharashtra-based PSU bank was booked.

That apart, they were several top executives against whom bribery cases were registered by Central Bureau of Investigation (CBI) or central vigilance commission (CVC). To name a few, State Bank of India deputy managing director (DMD) Shyamal Acharya was charged by CBI in November, 2013 for alleged graft in disbursing loans of above Rs 100 crore; in November, 2010, R R Nair, former CEO of LIC Housing Financein November, 2010 was accused of multiple charges including overlooking regulations while sanctioning loans, changing rules for appointments and extending loans to defaulters. In November, 2010 the CVC alleged severe norms violations against former Corporation Bank CMD, Ramnath Pradeep for similar charges.

The common thread of all these cases is the role of middlemen. Bankers accepted money for wrongdoings through middlemen. In all these cases bankers either offered loans to corporations violating prudentialnorms or facilitated illegal transactions involving huge amounts. At the same time, there have been hardly any major cases where private or foreign bankers involved in graft case in India, except few instances.

Hence the million dollar question: What is wrong with officers at public sector banks?

The reasons lie with the following:

First, it is an open secret that middlemen are actively involved with most high profile appointments in public sector banks. In many cases, prospective candidates pay up middlemen to negotiate with the power centers to ensure the slot.
The whole process starts the day when one executive director or bank chairman is called for the interview, these middlemen come to the scene (on behalf of politicians, who could influence the appointments) to begin negotiations with the prospective candidate. The stake involved could be several crores of rupees, depending upon the profile of the position offered and size of the institution.

“This trend has gained momentum in the last five years during the regime of second UPA. There is a hard bargaining always,” said a senior banking industry official, who spoke on condition of anonymity.

For those who bag the ‘costly job’, to recover the money through their regular compensation is impossible and the only way to do so is to extend favors to clients and receive kickbacks and they often do that. Some get caught, some do not.

“The problem is with the system,” said a financial services expert with a leading multinational consultancy. “Most of the time, top bankers at PSU banks are prone to take bribes to recover the moneythey paid to get the seat,” said the expert, who too declined to be named.

The deals are done with the help of expert middlemen, who negotiate on behalf of both. In exchange of the bribe they receive, the banker is supposed to influence credit decisions in favour of the beneficiary, who, by the rules, is ineligible for the loan. For instance, in the case of the corporate loan scam in 2010 that led to the arrest of eight senior executives at government banks and the CEO of LIC HousingFinance, the sleuths had pointed at the role of a company that acted as a middleman - Money matters India Private Ltd. The CEO of the company, Rajesh Sharma, was arrested for his role in the scam.

Second, there is a huge difference between the compensation levels of executives at the same ranks in public sector and private sector.

In 2010, former State Bank of India chairman, O P Bhatt famously said that he is the least paid CEO among the fortune 500 companies, when an average fortune 500 CEO earned above Rs 47 crore a year, that time.

Even in India, a look at the annual compensation received by CEOs of private banks will tell you the story. In 2013-14, HDFC Bank’s managing director, Aditya Puri received an annual compensation of Rs 6.07crore, while that of Chanda Kochhar, the chief of ICICI Bank, stood at Rs 5.23 crore. Shikha Sharma, managing director and CEO of Axis Bank, took home an annual compensation of Rs 3.75 crore. The remunerations of CEOs at state-run banks, including that of the largest lender, SBI is nowhere close to these.

For a bank executive, who probably began his career as a probationary officer and went through the ranks over the years, the chance to reach the top job ( after spending 25 or 30 years in the industry) is an irresistible idea. Getting past the ‘political’ hurdles to achieve that post is the dream of his life. This is quite unlike in the private sector, where competitive skills, career background and efficiency parameters decides the prospects of a bank executive.

“There should be professional approach in selecting the CEOs of state-run banks unlike the current situation, where ministers call the shots. Also there needs to be a relook at the compensation levels ofthe state-run bank officers. Otherwise you will see more such cases, where greed overtakes prudence,” said the expert quoted above.

Probably he is right.