Sucheta Dalal :Negligence is killing many public sector banks
Sucheta Dalal

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Negligence is killing many public sector banks  

Mar 20, 2006

Public sector banks are in a strange state of flux. They are torn between trade unions and their communist party leaders who oppose increased autonomy or privatisation, and the pressure to compete with dynamic private sector banks which have speed, operational flexibility and an incentivised work force.


Some PSU bank chairmen, notably State Bank of India, Bank of Baroda, Bank of India, Union Bank and Allahabad Bank have worked within these constraints to computerise operations, improve the brand image and enter new businesses. But the rest are muddling along, with disillusioned officials and poor leadership. So far, the monster bull market has hidden their poor performance, although they are listed. However, middle and senior-level officers are beginning to protest. At least two nationalised bank officers have officially complained to the Central Vigilance Commission (CVC) against corrupt practices and incompetence of their chairmen. In a recent case, the chairman is accused of taking on bad loans from another bank (in one case, this included the notoriously bad loan of a company promoted by a top film producer and his movie-star wife) and other irregularities.


Many of these are loans of around Rs 10 crore, where mischief probably floats below the radar of the Reserve Bank of India (RBI) or is dismissed as nitpicking by the officials. This also happens because officers indeed mix serious charges with petty issues such as the cost of renovation, branding, PR and, in some cases, even the cost of residential quarters for the chairman. Considering how badly public sector bank chiefs are paid, some of these complaints only reflect a disconnect between bank officials and the new market situation. After all, both SBI and Bank of Baroda’s experience shows their image-building exercise has paid rich dividends in terms of a sharp increase in deposits and acceptance of both banks by the all- important youth market.


If one were to analyse the complaints of nationalised bank officers (many voiced through off-the-record e-mails to this writer), it is clear that the biggest issue is quality of leadership. The government continues to foist chairmen who have little empathy with the culture and tradition of the bank in question and are only focussed on ending their careers on a high note or lobbying for post-retirement assignments. Again, there are notable exceptions to this statement.


An interesting case is that of Union Bank of India. Here, the finance ministry did well to announce MV Nair’s appointment as chairman and managing director (CMD) well before his predecessor’s exit on April 1. This is a departure from the usual practice of keeping banks headless for weeks after a chairman’s exit. Moreover, Nair has a six-year tenure, giving him plenty of opportunity to leave his mark.


• PSU banks trapped between obdurate unions and private sector competition

• The biggest problem is the foisting on banks of substandard chairmen

• Besides conflicting pressures from the finance ministry and the RBI


But, bankers point out, Mr Nair was with Dena Bank for less than two years, first as executive director and then chairman. AK Khandelwal, who preceded him, was with the bank for just a year before he returned to Bank of Baroda as its chairman. Where do these frequent departures of chairmen leave Dena Bank? If the government is uninterested in ensuring good long-term leadership at Dena Bank, it must at least push for its merger with IDBI Bank or another public sector bank. Otherwise, the uncertainty over its leadership is only demoralising its workforce. This is just an illustrative example.


Another problem, according to bankers is the government’s flip-flop on incentives to competent officers. These performance-based incentives were scrapped less than a year after these were introduced (by some banks), killing the spirit of their best officers.


The fairly public differences between the finance ministry and the Reserve Bank of India (RBI) on interest rate policy are also doing nothing to improve bankers’ morale. They say, for instance, that although RBI has hiked short-term policy rate by 25 basis points, the ministry has made it obvious that it does not want banks to hike their prime lending rates. Banks are now torn between choosing what is good for business and worrying about upsetting either the banking regulator or the finance ministry.


Without clarity on the role, structure and future of India’s public sector banks, the government is only allowing many of these to weaken or die a slow death.


-- Sucheta Dalal