Reserve Bank of India governor Raghuram Rajan has done well to call for a board-level restructuring of public sector banks. He wants the post of chairman-cum-managing director of such banks to be bifurcated with a non-executive board member as chairman and a managing director who oversees all the bank’s operations. The background against which he has made the suggestion is all too evident. It was the arrest and incarceration of the CMD of Syndicate Bank, one of India’s leading banks, that forced Rajan to come up with the suggestion. But, the idea has been hanging fire for quite some time.
The P J Nayak Committee that went into the problems bedevilling public sector banks had suggested a series of measures to tone up their administration but for reasons best known to those in power, they were not implemented. The panel wanted the government to reduce its stake in the banks and bring back professionalism. It suggested a transparent system of selection of CMDs and directors who will be answerable to shareholders. It also sought a better system of remuneration for CMDs—commensurate with industry standards and the heavy responsibilities vested in them. Alas, the government did not want to give up its powers to foist its favourites on the banks.
Because the CMDs are selected for political, rather than banking, reasons, they are tempted to tweak the banks’ lending rules to meet the political needs of their masters. They may be getting salaries comparable to government servants but the salaries are nowhere near the compensation packages private and multinational banks provide to even lower-level staff. Also, they are not assured of long tenures, as a result of which they are tempted to make hay while the sun shines. It is also a truth that some of them reach the position of CMD by paying bribes to politicians in power. Seen against this backdrop, the Syndicate Bank chief’s arrest was a reminder of the rot that had set in the management of public sector banks.