File photo of the Reserve Bank of India (RBI). The govt’s decision appears to be an indictment of the flawed process followed in the appointment of S.K. Jain as chairman and managing director of Syndicate Bank in February 2013. Photo: Pradeep Gaur/Mint
Anup Roy | Ira Dugal Live Mint:TUE, OCT 28 2014. 12 07 AM IST
Existing vacancies to be filled through new process; bankers and
analysts say RBI may have a stronger role
Mumbai: In an attempt to repair some of the damage done to the reputation of public sector banks after the loan-for-bribe scandal at Syndicate Bank, the government has decided to review and strengthen the process of choosing top executives at state-owned lenders, scrapping the current selection process.
The government’s decision appears to be an indictment of the flawed process followed in the appointment of S.K. Jain as chairman and managing director (CMD) of Syndicate Bank in February 2013—a point made by the Central Bureau of Investigation (CBI) in August this year.
On 13 August, Mint reported that CBI has written to the finance ministry that the procedure adopted for the appointment of Jain had not been transparent. Jain was arrested by CBI on 2 August for allegedly taking a bribe of Rs.50 lakh to sanction a loan in violation of banking practices.
The government’s decision to review and amend the process of appointing CMDs and executive directors (EDs) of public sector banks was based on the report of a committee consisting of secretary (expenditure), secretary (school education) and governor of the Reserve Bank of India (RBI).
The panel was formed to examine the selection process adopted for choosing CMDs and EDs of public sector banks for the year 2014-15.
“After receipt of the report of the Committee, the Government has decided to cancel the current selection process of CMDs/EDs of Public Sector Banks(PSBs). As a result, eight posts of CMDs and fourteen posts of EDs would require to be filled up de novo,” the government said in a statement on Monday night. De novo is a Latin expression that means anew.
Typically, a four-member panel comprising the financial services secretary, an RBI representative (typically a deputy governor) and two external members are on a panel that interviews bank EDs for the post of CMD.
EDs are called for interviews based on seniority, whether they have completed two years of service and whether they have two years of service left. Recommendations are then sent to an appointments committee.
Six state-owned banks are currently operating without CMDs—Syndicate Bank, Oriental Bank of Commerce, Canara Bank, United Bank of India, Indian Overseas Bank and Bank of Baroda. CMDs of Punjab National Bank and Vijaya Bank are set to retire before the end of the current calendar year. Four banks currently have positions open for EDs and many more are expected to retire this fiscal year.
While new appointments were yet to be announced, the process was nearly complete and candidates had been identified, said a serving senior banker familiar with the process, requesting anonymity.
“The Government has decided that a fresh process for selection would have to be implemented for filling up these existing vacancies wherein the Governor, RBI or his nominee of the rank of Deputy Governor should be a part of the selection process,” said the government statement.
Pratip Chaudhuri, former chairman of State Bank of India, the country’s largest lender, said the move to review and amend the selection process was the right thing to do.
“The way some of the previous selections were done was disgraceful and so the government was in a bind. If they endorsed the previous selections, it would have meant endorsing wrongdoing,” he said.
The government also said that it had decided to “finalise a new process for selection of CMDs/EDs for all future vacancies”.
It did not specific what the new process of appointment would be, but bankers and analysts said that RBI may have a stronger say in the process.
A recently retired PSU bank chairman said the process followed so far had been heavily tilted towards the opinion of the secretary of financial services.
“The rest of the members never had any opinion but used to give their nods to whatever the financial services secretary decided,” said the former chairman, who requested anonymity.
A banking analyst also said that government’s nominee had the final say in deciding the appointments. This may get curtailed now with RBI playing a larger role in the process, said the analyst, requesting anonymity as he is not authorized to speak to the media.
RBI governor Raghuram Rajan has been calling for a change in the appointments process and measures to strengthen governance at state-owned banks that control 70% of banking industry assets.
“We have to change the appointment process and expand the talent pool for management and boards of public sector banks, it has to be much more transparent and driven by people with strong capabilities. We have to strengthen board oversight and powers, boards have to be empowered and made more accountable,” Rajan said at a banking industry conference on 15 September.
The need for change in the management structure at state-owned banks was also flagged by an RBI committee appointed to review the governance of boards of banks in India. The recommendations made by the committee, headed by veteran banker P.J. Nayak, included the need for longer tenures to public sector bank chiefs.
The government is yet to take a final view on the tenures although finance minister Arun Jaitley said on 21 August that fixed tenures were being considered.
“What is really needed is fixed tenures for PSU bank chiefs. Currently, CMDs are appointed for 18-24 months. Before they can make any material difference to the functioning of the bank, they retire,” said Vaibhav Agarwal, an analyst at Angel Broking Ltd.
Weak governance practices at state-owned banks have been partly blamed for a surge in bad loans in the banking sector. At 40 listed banks, gross non-performing assets rose 21.03% to Rs.2.52 trillion at the end of June, fromRs.2.08 trillion a year earlier.
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