Three years after it was set up, the Banks Board Bureau continues to bat for better governance structures among Public Sector Banks (PSBs) and the need for giving complete autonomy to bank boards.
Such autonomy, the Bureau believes, will help banks lean against the risk of ‘behest-lending.’ Such practices were rampant in the past, causing the current crisis among state-run banks.
“In order to strengthen Board governance, (we) recommended setting a standard operating environment on governance in PSBs, which should be allowed to have the capacity to lean against the risk of behest-lending and to reduce the moral hazard from implicit sovereign guarantee,” the Bureau noted in a proposal submitted to the government in March, 2017. Last week, it further reiterated, and even made fresh, recommendations in key areas that needed to be beefed up besides improvising governance practices among PSBs.
For instance, currently, the required workforce of a PSB is arrived at based on a prescribed formula centred on its total business viz., total advances and deposits. “Such prescriptions lead to perverse incentives to build balance sheet size at the cost of building attendant risks which manifests later,” it noted.
To mitigate this, the Bureau recommended that respective bank boards be empowered to decide the organisation structure and deployment depending upon needs and strategy of each PSB.
Likewise, credit underwriting decisions for large borrowers is currently undertaken by the Management Committee of the Board (MCB) comprising non-executive Directors. However, the recent episode of stressed asset build-up makes it evident, in varying degrees, that PSBs have not derived full benefit from the collective experience, insight and diverse exposure that non-executive Directors were thought to bring to bear while taking credit underwriting decisions for large borrowers.
“Therefore, it cannot be stated with certainty that the participation of non-executive Directors for underwriting large value proposals would fulfil the spirit of good governance. Rather, it could be argued that presence of non-executive Directors on the MCB would dilute their ability to exercise supervisory oversight on the management function of the Board,” the Bureau said and suggested appointing a Risk Management Committee (RMC) with a mandate to decide on the credit rating and credit exposure threshold matrix within which the MCB, as well as various executive committees/individuals, are to undertake various credit underwriting decisions.
Following bank nationalisation over five decades ago, though governance standards improved, they are yet to make inroads into the PSB ecosystem. The Bureau suggested inserting a provision in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/80 to state that wherever provisions of the Act are inconsistent with the provisions of Companies Act, 2013, they would not be applicable, provided there’s no inconsistency with provisions of the Banking Regulation Act, 1949
Meanwhile, despite common regulators and a common major shareholder (government), there’s a wide variation in the number of committees of the Boards across PSBs and no unequivocal evidence to prove that more committees imply better oversight and therefore, better performance. Hence, the Bureau suggested rationalizing the number, composition and mandate of the committees of the Board.