Bank Boards as ‘NPAs’
Yesterday’s BUSINESS STANDARD had an interesting article tiled :”BANK BOARDS AS NPAs”
The author Shyamal Majumdar brings out some shocking ways in which our bank boards function and hold meetings.
Here is the full text of the article.
Bank Boards as ‘NPAs’ Shyamal Majumdar:
Taxi fare reimbursement policy often takes precedence over loan recovery strategy in the board meetings of public sector banks
BS May 23, 2014
Public sector bank (PSB) boards are full of honourable men and women, but the quality of discussions during board meetings just doesn’t live up to their exalted positions. This is more than evident from the report of a committee headed by P J Nayak on governance in bank boards. The committee, in fact, has done the unique job of analysing actual board notes to arrive at this rather damning conclusion.
The scrutiny of board deliberations suggests that PSB board members focus more on compliance with regulations and other trivial issues. For example, in one bank, the taxi fare reimbursement policy took up more time than the loan recovery policy. Other issues discussed included purchase of office premises and provision of leased residential accommodation to officers. In another bank, the board was more interested in discussing the details of a lecture by the chairman at a college; how extensive coverage can be given to the finance minister’s visit to the bank; and disciplinary action against manager-level employees.
The location of branches and ATMs was another favourite topic. The surprising point to note is that PSBs, despite their government ownership, focus less on financial inclusion than their private sector peers. There’s more. On both financial reporting and compliance, private sector banks discuss in detail three times the number of issues that PSBs do. Among the areas of recent concern in PSBs is the worsening asset quality, and yet there is a general absence of a calibrated discussion in boards of the sectors within which the greatest stress has emerged, and implications this might have for further loan growth in those sectors. Recoveries through the Debt Recovery Tribunals and under the SARFAESI Act are inadequately discussed, and progress in bringing stressed assets back to health are also insufficiently analysed. As the report says, scenario analysis through stress-testing is absent, and specific plans for worst-case scenarios find no mention in board meetings.
It is difficult, therefore, to disagree with the panel’s suggestions that there are limits to the ability of regulation and supervision to upgrade the quality of board deliberations in PSBs. And, that there is an urgent need for these boards to be empowered with strategic and domain skills, and with independence by changing the entire appointment process for boards. As the Nayak panel says, the existing appointment process is structural. The Bank Nationalisation Acts of 1970 and 1980 lay down in granular detail the manner in which board positions are to be filled. There are eight broad categories of directors. Similarly, the State Bank of India Act of 1955 refers to seven director categories for SBI, while IDBI Bank (constituted under the Companies Act) has five different director categories. In comparison, the new Companies Act of 2013 lays down three categories of directors, though not in a structural manner: executive directors, part-time independent directors and part-time non-independent directors.
The current appointment process of PSB board members has given rise to the ridiculous practice of bank chairmen having no say on who all are coming in as non-official directors. As a result, if some of these directors are of poor quality or get on to the board with parallel agendas, the chairman starts viewing them as unhelpful to the interests of the bank. That’s the reason why many of the PSB boards have seen internal fissures leading to poor governance. There is no doubt that director quality is compromised in government’s appointments. While the government seeks the professionally qualified for board positions, new private sector banks, and increasingly old private sector banks, search for the professionally talented. The distinction matters. For example, almost all chartered accountants would qualify for appointment to PSB boards, but a very small subset would be sought after by the private sector bank boards.
In general, it seems the questions nobody has asked are: can PSB board members really provide the management with guidance and control as their mandate formally requires? Does the composition of the board matter for the bank’s performance during a crisis?
Attempts to improve the quality of PSB boards have been made in the past without results. For example, the Ganguly committee on corporate governance in banks had raised some critical issues way back in 2002. Among other things, the committee had suggested that the boards must have eminent people who are capable of providing a necessary oversight coupled with their duties of loyalty to the shareholders and provide the necessary checks and balances. The board should also be empowered to question the management and must be comfortable in insisting upon straightforward explanations from them. In addition, the boards should ensure that the responsibilities of directors are well defined and the banks should arrange need-based training for the directors in this regard.
The result has been predictable. Banks were advised to place the report to their boards and directors were to sign the covenants in public interest. Many directors ignored the suggestion.
In its report, the Nayak committee has also given detailed suggestions on the way out of the mess, giving a lot of food for thought for the new finance minister. Hopefully, the report will not remain unread.
My response to this article by way of a letter to the Editor is as under:
Dear Sir, This refers to the tongue-in-cheek but a shocking article titled: ” Bank Boards as ‘NPAs’” by Shyamal Majumdar (BS 23RD May 2014).
The crux of the problem is about how directors are appointed or how they manage to get appointed on the Boards of Banks. There seems to be lack of basic skills analysis of directors. Are they competent to join the board is a mute question. It is well known that competence comes from experience, knowledge, skills, attitudes, values and beliefs. In the case of Bank boards, which are the ultimate decision makers, competencies of directors are particularly important. Further, from the deliberations reported in the article based on findings of the committee headed by P J Nayak on Governance, it is very essential that the Boards discharge their duties “effectively” rather than “adequately”.
Hence it is felt that, to be effective, there is need for boards to have an appropriate mix of skills, as well as an appropriate composition, size and a sense of commitment. Since the directors are required to perform a range of complex tasks and they often come from a range of different backgrounds it may or may not equip them with the skills required to perform these tasks. Therefore, what is important for a board is that it has a good understanding of what skills it has and what skills it requires. This can be done through Board Skills Analysis.
Studies have revealed that the key benefits from a board skills analysis include: identifying gaps in skills and diversity; highlighting the strengths around the boardroom table to enable the directors’ skills to be utilized to their fullest potential; identifying potential professional development opportunities for board members; and informing the recruitment process for future board members. Once the board has knowledge of its deficiencies and addresses these gaps in some form or other, it will go a long way towards individual board members demonstrating the care, skill and diligence expected of a director.
Lots of research and many studies have been done and books have been written on the subject matter. Broadly, there are four levels of competence required in a board: a. industrial experience and knowledge; b. technical/professional skills and specialist knowledge; c. essential governance knowledge and understanding and d. behavioral attributes and competencies enabling individual board members to use their knowledge and skills to function well as team members and to interact with key stakeholders.
Here is hoping that the new Government and the new Finance Minister will read the report and initiate required steps to avoid future Bank boards becoming NPAs!
J S BROCA, NEW DELHI