The Indian Banks’ Association has released a somewhat self-congratulatory report on the progress of reforms in public sector banks in collaboration with the Boston Consulting Group. The report details steps taken by banks under the finance ministry’s Enhanced Access & Service Excellence (EASE) framework and ranks lenders based on a so-called EASE index. This reform agenda is also linked to government recapitalisation of banks.
State-owned banks have taken a number of steps to clean up their credit culture and improve accountability. They now use 5-6 independent data sources for large credit appraisals, have identified gaps and strengthened the lending process, and decided that each member of a lending consortium holds a minimum 10 percent share.
The report further says that PSBs are setting up in-house techno-economic valuation cells to gauge projects instead of relying on third-party assessors. At least 20 PSBs have ensured that different employees–across roles such as credit appraisal, monitoring and recovery for large loans–are in charge before and after a loan is sanctioned.
That’s the good news.
On the flip side, it is a reflection of the sad state of affairs in Indian public sector banking that the government/external agencies have to hand hold lenders to ensure that this basic hygiene is followed when extending loans. (One can argue here that private sector banks have also faced bad loan problems. But the sheer weight of soured loans and frauds at state-owned lenders point to bigger problems there.)
In any case, only baby steps have been taken. "They [PSBs] have made early-stage progress in a few Action Points such as adoption of enhanced policies and processes for credit appraisal and monitoring, consortium-based lending and risk management," says the report.
The fact that government handholding has extend to things such as improving customer service also speaks of the distorted incentives for PSB management. One would think that a government prod would not be needed for simple things such as ensuring customers can speak in their regional language in bank call centres (congratulations, 87 percent can do so now), and home/mobile banking services are consumer friendly.
The EASE framework takes a crack at resolving this distorted incentive structure by asking bank boards to evaluate whole-time directors on their performance in implementing this reforms agenda. But that is only a start.
PSBs need to utilise their human resources better. They need to link pay to performance and reward merit. Moreover, as BCG points out, PSBs should allow for lateral inductions in key specialist positions and compensation should be market-oriented and benchmarked to the best.
When merit is rewarded and managers are paid well, mismanagement would automatically go down. It will eliminate the sloppy lending habits of PSBs, which as a CVC analysis of bank frauds showed, was mostly owing to incompetence, laziness or corruption.
That’s not all. The government would do well to remove the Reserve Bank of India representatives from the board of PSBs and give the central bank the same regulatory powers it holds over private lenders. Boards need to be strengthened by inducting more professionals rather than career bureaucrats and a long-term strategy of bringing down the government’s holding is also essential. Else, PSBs stand in the danger of falling into the same rut as the economic cycle turns.
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