The Hindu Business Line : More power to bank chiefs

The Government's proposal to enhance the powers of the Chairman and Managing Director (CMD) of a public sector bank to sanction credit or write-off of bad loans is a welcome move. For over two years now, public sector banks have been growing at a furious pace — bank credit has grown 31 per cent these two years. If nothing else, the logic of numbers dictates that decisions on credit are better done at the operational level rather than by the board of directors if a bank has to compete in the market place.

The business environment has been changing at a disconcerting pace for public sector banks, which have had to face stiff competition from private and foreign outfits for any new business. Granting them greater autonomy in lending decisions should make them more nimble, goes the argument. But will that alone deliver the goods? Though the public sector banks have improved considerably over the last decade, the fear of vigilance action does not exactly aid fast decision-making. Conferring greater powers to bank chiefs may also be fraught with the risk of subjecting them to greater pressure from the politico-bureaucratic-corporate cabal with all its implications for the health of the banking system. It is no secret that big borrowers in Mumbai and Delhi, which together account for about 40 per cent of the loans disbursed in the country, wield considerable clout even in matters of the very appointment of PSB chiefs. The problem can be addressed (although not eliminated) by institutionalising a cooperative decision-making structure within the organisation so that a credit proposal does not originate and end with the CMD and a coterie around him/her. Additionally, the CMD's powers of sanctioning loans could be linked to the RBI-mandated `prudential limits' on lending which are computed with reference to the bank's shareholder funds rather to an absolute sum as is the case now. As for write-offs and compromises, a Settlement Advisory Committee comprising a retired judge, a retired senior banker and a general manager of the bank now vets all such proposals.

While entrusting the CMDs with more powers is desirable, the Government must also look at the quality of oversight provided by the board of directors. Rarely does it seem to add value to business decisions or provide the checks on operational excesses, going by some of the celebrated cases of financial distress in banks. Clearly the system of identifying candidates for the bank boards needs to be overhauled so that only persons of calibre and integrity are appointed to these positions.