One bad apple?

One may be tempted to argue that Syndicate Bank, whose chairman is embroiled in a corruption scandal, is neither a ‘systemically important’ bank nor an outlier on non-performing assets. But the fact that the bank’s chairman and managing director (CMD) has been charged with taking bribes as a quid pro quo for not reporting defaults and extending new loans to highly leveraged companies, is a cause for serious concern. While there must be a presumption of innocence until there is a verdict of guilt, the facts as they have been reported raise some larger questions about public sector banks. Are the huge NPAs in PSU banks entirely attributable to economic adversity and bad judgment? Or do we have reason to suspect that they owe significantly to governance issues?

The Syndicate Bank case draws attention to the bank’s loan appraisal and risk management systems. Even assuming the CMD enjoyed the discretion to make suo motu lending decisions without consulting the internal committee, how could there be a discretionary element in recognising NPAs? Did the bank have no internal controls to automatically flag and curtail exposure to a borrower with high leverage and a non-investment grade credit rating (such as Bhushan Steel)? Reserve Bank of India Governor Raghuram Rajan has described the Syndicate Bank case as a one-off episode and said that it shouldn’t reflect on all public sector banks. But the fact is that there have been previous incidents that have exposed the structural weaknesses in the basic governance mechanisms of public sector banks. Only last year, the CBI court sentenced a former Indian Bank CMD and four other top officials for sanctioning loans without collateral and arbitrarily waiving loans to certain borrowers. United Bank was in the news for much of last year after a sudden spike in its NPAs pushed it into losses. Given that CMDs as well as executive directors are government appointees, politically directed lending is commonplace in PSU banks, compromising the interests of borrowers and depositors. Aggravating the problem is the poor compensation and short tenures for bank CMDs, which compromises accountability. There is also the issue of wages — while the CEOs of private sector banks received an annual average compensation of ₹3 crore a year in 2012-13, PSU bank CMDs received ₹19 lakh, according to a survey.

It was precisely such weaknesses that prompted the PJ Nayak Committee to recommend a comprehensive overhaul of the ownership and governance structures of public sector banks. Its key suggestions were that the Centre dilute its stake in state-owned banks, put in place professional management teams and move to a transparent selection process for their CMDs and directors. It also mooted better compensation and longer tenures for bank chairmen. The Syndicate Bank episode is another reminder of the need to act on the recommendations expeditiously.

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