With PSU Banks’ Employees Now Having Skin In The Game, Indradhanush Beginning To Fall In Place

The Finance Ministry has given its in-principle nod for offering employee stock options (ESOP) to public sector bank staff. This is one of the follow up actions to the government’s Indradhanush scheme launched in August 2015 as a seven-pronged solution to the problems faced by India’s sarkari banks. With their bad loans surging by 56.4 per cent in the last one year and by 135 per cent in two years, public sector (PSU) banks have been making news for all the wrong reasons. Bank unions went on strike demanding compensation for overtime work done during demonetisation and the State Bank of India merger with associate banks is facing fierce opposition in some places like Kerala. Much to the disappointment of the economic right, the Indradhanush scheme had stayed clear of any major restructuring, consolidation or privatisation but covered the following seven “revamping” efforts, pieces of which are now slowly falling into place.

The first element of the scheme is appointments. The scheme envisaged separation of the chief executive officer (CEO) and managing director's (MD) post from a non-executive chairman in order to improve corporate governance of the banks.

Second, the Bank Boards Bureau (BBB) has replaced the appointments board and makes recommendations for appointment of bank chiefs. It also offers advice on capital raising and business strategies of the banks.

Third, capitalisation. The scheme estimated that the banks need Rs 180,000 crore of capital over a period of four years. The government will provide Rs 70,000 crore, which it has been doing over successive budgets, while the remaining will be raised by the banks themselves.

Fourth, de-stressing of balance sheets using a combination of old and new strategies.

Fifth, autonomy. This is the government’s commitment towards not interfering with the banks so that they take decisions with commercial interest in mind.

Sixth, accountability. Key performance indicators (KPIs) would replace statement of intent as a way of measuring performance of banks. The KPIs rely on quantitative and qualitative factors and would be linked to the performance bonus of bank chiefs.

Seventh, governance reforms. This is really a summary of the previous points. It talked of the Gyan Sangam and reiterated the no interference policy.

What has been the progress on the ground? In the initial days of the scheme, the government was very prompt on appointments and implemented the separation of chairman and chief executive officer posts for five banks but subsequently put the brakes for inexplicable reasons. Eight executive directors were appointed last month based on names recommended by the BBB in last September. The crucial post of CEO and MD has remained vacant in some cases such as Indian Overseas Bank where the caretaker CEO’s term has recently been extended. The problem is that the BBB is a recommending body and the government has been slow in making the appointments. It is understandable that the government needs time but uncertainty over crucial appointments hurts the banks. Succession planning must begin in advance and executive directors should not hold additional charge for any point of time. CEOs must be given longer tenures than the current three years to allow them to introduce long term strategies. There must be talent acquisition from the private sector.

Not just top management appointments but the BBB should be allowed to make recommendations on hiring practices across levels. Salaries in public sector banks at entry to middle levels are quite attractive and so it should be possible to attract the best talent from top educational institutions. Since campus hiring is not possible due to a court ruling, banks should pro-actively invite students of top colleges to appear for an online exam and then interviews can be conducted by the Institute of Banking Personnel Selection at the local bank offices.

Coming to the BBB, it has its own problems. It does not have a full-time head (its chairman Vinod Rai also heads Indian cricket’s committee of administrators that is now busy with Board of Control for Cricket in India matters and preparations for the Indian Premier League). The board ironically functions from the regulator (Reserve Bank of India's) office. The government must make Rai or anybody else the full time chairman with an office and make a commitment to act on its recommendations in a time bound manner.

On the matter of capital there is some disagreement over whether the government’s budgetary allocation is sufficient. Canara Bank has recently gone for a rights issue which other banks could follow to raise additional equity from the market. The capital situation of banks would also be helped by improving profitability in the next few quarters and the pressure on capital may ease as private sector banks and new banks pick up the tab on lending. The government has linked a part of the capital allocation to a bank’s performance but it is more important to incentivise performance which is what the recent move on ESOP should achieve. Unfortunately it has been reported that ESOP will be allowed for better performing banks which makes it a reward rather than an incentive.

The Indradhanush scheme had some sound ideas for improving risk management and reducing bad loans. Larger policies such as the Insolvency Act, Ujwal Discomm Assurance Yojana, higher public investments in infrastructure, longer tenure for bank chiefs and performance bonus for reducing non-performing assets should also help to bring down bad loans. Finally, on the issue of autonomy, the government should empower the respective boards and demand that they follow the Securities and Exchange Board of India and RBI’s requirements on corporate governance, board meetings, composition and conduct.

The government’s ESOP comes at the right time as stock prices of many public sector banks have halved in the last five years. Now employees have an incentive to deliver the goods and enhance their own wealth. Indian banking is going through a turbulent period. Consolidation is probably unavoidable. Privatisation may be an option. But before all of that the government must set up a BBB 2.0 that will be a bank holding company with powers of appointment instead of merely being a recommending body.