Break the shackles

While the Centre’s decision to alter the selection process of CMDs and EDs of public sector banks is both necessary and welcome, the new rules it has framed for such appointments fail to address the core of the problem. The new selection process was recommended by a committee appointed by the Centre following the arrest of Syndicate Bank Chairman and Managing Director SK Jain; it was on this committee’s suggestion that the Government cancelled the selection of eight PSU bank CMDs and 14 executive directors. The new selection process unfortunately is not substantially different from the earlier one. A major bone of contention was government interference in appointments, a fact emphasised by the PJ Nayak Committee. Under the new selection process, all candidates will be interviewed by three sub-committees, each comprising a member from the Department of Financial Services (a government body), the RBI deputy governor and four experts. As before, the final approval for appointment is to be granted by the Government. The other problem, which resulted in allegations of intermediaries and corporate fixers offering appointments in lieu of favours to some corporate groups, has not been addressed. While the Government may continue to remain the major shareholder, there is an urgent need to professionalise and depoliticise the governance structure.

With public sector banks commanding more than 70 per cent share of business in the banking sector, it is imperative that they are run well. The PJ Nayak Committee had recommended constitution of an independent Bank Boards Bureau (BBB) comprising senior or retired commercial bankers. While this is a worthwhile suggestion, even better would be to permit each bank to decide on its own ED and CMD. The board, which is accountable and responsible for the performance of the financial institution, should ideally select these officials. This will bring in a measure of accountability to the process; selection committees, even if independent and professional, may not feel the same degree of responsibility about bank performance.

That said, selecting from within the same bank is fraught with challenges. With not enough candidates to choose from, the panel may need to go one level below to identify leadership material. Banks have to strengthen their internal processes to get the right kind of AGMs, DGMs and GMs. The banking system is undergoing what a former finance secretary called the “missing middle” — more than half the officers who man critical positions are in the process of retiring shortly or over the next couple of years. Addressing this issue will require innovative solutions — including recruiting laterally from the private sector. Salaries may be a constraint and the Government should move in the direction of lifting salaries to more realistic levels of market-determined pay. The sooner the Government gets started on these things, the better for India’s banking system and the economy.

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