How government selects bank chiefs

The fact remains that the government looks vulnerable when it comes to the appointment of chiefs of public sector banks as the rules are often broken and made with the apparent intention to accommodate certain individuals. Photo: Hemant Mishra/Mint

Live Mint : Tamal Bandyopadhyay  11 Nov 2013

The government is following different rules for different banks at different times and there is no uniformity in its approach

The government cleared the appointment of Arundhati Bhattacharya as the chairperson of State Bank of India, the nation’s largest lender, a week after her predecessor Pratip Chaudhuri’s term ended. For one week, the corner office on the 18th floor of the State Bank headquarters on Madame Cama Road at Nariman Point, Mumbai’s business district, was not occupied but the bank’s four managing directors were running the show. This, however, doesn’t mean that the government always takes time to act on such critical appointments in the financial sector. Had that been the case, a high-profile panel, led by the Reserve Bank of India governor Raghuram Rajan, would not have interviewed 19 executive directors of public sector banks on 31 October for six chairmen’s positions that will fall vacant between August 2014 and March 2015.

The United Progressive Alliance-led government is on an overdrive to fill in the top positions in the state-run banking industry. The first two of such positions will fall vacant in August (Indian Overseas Bank and Bank of Baroda); another two in October (Canara Bank and Oriental Bank of Commerce); one in January 2015 (Vijaya Bank) and, finally, United Bank of India’s top job will be up for grabs in March 2015.

Well before that, five other banks will see a change of guard and prospective candidates have already been empanelled to fill these positions. On Friday, Sushil Muhnot, chairman of Small Industries Development Board of India, was appointed as chairman and managing director (CMD) of Bank of Maharashtra. Four other CMDs of public sector banks will retire between December and February. The head of Union Bank of India will step down in November, Vijaya Bank in December, and Punjab and Sind Bank and Allahabad Bank in January. While the government has already identified the successors of the incumbent CMDs in these banks, it is now in the process of selecting CMDs for six others, the first of which fall vacant nine months later.

Incidentally, Vijaya Bank features in both the lists. The current chairman of the Bangalore-based bank will retire in December and V. Kannan, executive director of Oriental Bank of Commerce, is slated to take over as its chief in January. As Kannan will be there just for a year, and retire in December 2014, the position will once again fall vacant in January 2015. Indeed, one must give credit to the government for being meticulous in its plan to fill in all possible vacancies in advance.

Typically, for every two positions, at least three people need to be interviewed. So, for six chairmen’s positions, the interview panel would have needed at least nine candidates. But there weren’t nine candidates who could fulfil the two critical eligibility criteria—a two-year residual service and at least a one-year experience as an executive director. As there have not been too many executive directors who could meet both conditions, the government relaxed one of them. It stuck to the two-year residual service condition but decided to overlook the requirement for one-year experience. Thirteen of the 19 executive directors who were interviewed have less than one-year experience and a few of them had become executive directors in August this year. As general managers, they had appeared for the interview to become executive directors in February.

This fast-track promotion policy has not gone down well with many. It’s not because relatively younger executives are set to become chiefs of banks but for the fact that the government is following different rules for different banks at different times and there is no uniformity in its approach. For instance, while selecting the State Bank of India chief, the government dropped the two-year residual service clause. Four managing directors were called for the interview and only one of them had more than two years of service left. The government waived this clause and, at the same time, introduced a new one—irrespective of the years of service left, the minimum tenure of a State Bank chairman is now three years. Had the same rule been extended to the public sector banks, the scene would have been different.

In fact, two members of Parliament have written to the government on this. One of them belongs to the Bharatiya Janata Party and another, the Shiv Sena. I don’t know what these two gentlemen have to do with the appointment of chiefs in public sector banks but their letters make one point clear that such appointments are sensitive, for politicians as well as Indian corporations who borrow from banks. At least two executive directors in the past had told me that they had got calls from people willing to help them ahead of their interviews. Typically, such calls are made by chartered accountants who claim to be connected with relevant people. They do not ask for anything in return while offering their service. Both the executive directors claimed to have not entertained such calls as they were not willing the pay the price to the brokers for their service.

Typically, one is required to return the favour by giving loans to corporate houses and individuals who would later approach the chairman through these brokers. As a result of this, a bank may end up piling up bad assets. Such brokers also put pressure on a chairman for restructuring bad loans. I could not verify the allegations made by these two executive directors but the fact remains that the government looks vulnerable when it comes to the appointment of chiefs of public sector banks as the rules are often broken and made with the apparent intention to accommodate certain individuals. It is extremely difficult to prove this but one always gets the uneasy feeling that things are not done transparently. To defend its credibility, the central bank should disassociate itself from the process.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author ofA Bank for the Buck, a book on HDFC Bank.