Former bankers, who have served India’s largest public sector bank, have found reason to believe the new selection process of PSU bank chiefs is quite a clone of existing one, which has recently been scrapped by the Centre.
In an interview to CNBC-TV18, former State Bank of India chiefs — AK Purwar and Diwakar Gupta, said the new selection process suggested so far is also susceptible to malpractices. Both of them support a longer tenure for the banking chiefs. "Having short tenure stands to be a major problem for banks that may be not remedied in the near-term, " says Purwar who once served as chairman of SBI. They also advocate the need for each bank to have its own Executive Director and CMD, handpicked by a professional board.
It may be reminded that in the wake of many bribes-for-loan scandals at state-run banks, the government on Monday scrapped the selection process to select heads for PSU banks that will now be filled expeditiously through a new selection process.
While Purwar wants to empower the board in the selection process, Gupta insists the way forward is all banks produce its own ED and CMD. The former SBI CFO asks why is that the top job barely goes to bankers from Corporation Bank, Dena Bank or even PNB?
Gupta, the ex-CFO and MD of SBI, feels there is a need to predetermine timelines and allow transparency in the process along with making technology an integral part of recruitment.
RBI Governor Raghuram Rajan too had earlier stressed on the need for the selection process to be more transparent.
Below is the edited transcript of AK Purwar and Diwakar Gupta’s interview:
Q: The current selection committee consists of RBI Governor’s nominee, usually the deputy governor, the banking financial services secretary is always there, there are two academics, and one ex-banker. That looks like an exemplary selection committee. What is going wrong, what has to be righted?
Purwar: I would put it this way that if we look at last one decade or maybe last 20-25 years the biggest problem with the banking system is that the chairmen or the CEOs have a very short tenure. Sometimes they have a tenure of 1-3 years. If you are head of a bank, you require one year to understand it, one year to plan out what you want to do and before you plan and start implementing, your tenure is over. So you hardly get any time to work. This was something wrong. Also off late some of the things which we have seen, there are lots of concerns about corporate governance also.
Q: That was why the appointments got cancelled.
Purwar: The way in which lendings were being done, the way in which the work is going in the institutions. Banks are ones that survive on trust, trust of the people. So the CEOs have to be an exemplary character above everything else. Though some of the incidents which you know and we all know in public domain, it reflects somehow or the other of the quality of selection.
Q: On a previous occasion, you told us the banking circles know who are the good eggs and the bad eggs. Now how do you get it into the selection process?
Gupta: Let us get back to the selection process itself. The current framework that has been announced is no different from the existing framework at least in the time that I have known these selections - maybe five or six years first hand. It is always the governor who is the chairman of the search committee, he appoints a sub-committee in which there is a deputy governor, there is the secretary of financial services and there are two experts. That is the way each one of us have gone through and from what I have known from my public sector bank colleagues that is the way they have gone through too. So the issue really is not so much about the system being bad as of a system being as good as the people in it and that is where the challenge lies.
The problem is human nature. People would like to get ahead and people who are very competent will get ahead on competence. People who are not all that competent will lose other things.
Q: So how do you right this?
Gupta: I would think that the government has to get out of the selection process because there is vested interest there. People want to curry favours, people want to return favours, and people want to suck up to the system; that is the issue. So the government is only a major shareholder in terms of governance also.
So for the PJ Nayak committee recommendation, there is a lot going for them. We have known the PJ Nayak committee report in media and general circles as saying that PSBs should be less than 50 percent government owned. No, we don’t need to do that but we need to get the governance structure right so that we have the board to whom the bank is accountable and the board that selects the CEO. Otherwise, some kind of that cronyism will always creep in because that is human nature, not because people are bad or because some individuals are bad. Today that is what is happening. You have lobbying for post, people then get in when they should not have, when they get in and they do what they should not be doing.
Q: Do you think the RBI should have a stronger role in the selection process and the government should now get out of the whole process altogether?
Purwar: No, that is one view but my feeling is that RBI already has a very strong role in the selection process. But having said that, I would tend to agree with what Mr Diwakar is saying that if a board is responsible and accountable for running of an institution and then you don’t give the board any say as far as the selection of the CEO is concerned then don’t you feel that there is a huge amount of disconnect in terms of authority to govern, accountability to produce results so on and so forth.
I also feel, which I have often been saying, that there is no need for such a large number of public sector banks, it should have been much smaller. What will happen is that the process, the boards or committee that select the people, the people will be of stronger calibre, good quality, and sufficient term.
Q: One of our correspondents Sapna reported what she was picking up from the finance ministry that this feedback mechanism is going to be strengthened. At the moment there is some informal feedback that is sought and they want to make it more formalised, probably some checkboxes, probably getting comments in writing. Do you think that can be formalised, most chairmen know who is up on the take?
Gupta: That can be formalised but it has to be formalised in a transparent manner. So, if you still have the discretion of whose feedback you will take then there is a problem. You have 360 degree feedback, let a random generator pick up employees, let them anonymously give a feedback as long as they can run that. The issue right now is about running processes with integrity rather than to find a great solution. Everyone knows what is happening. In a bureaucracy the process becomes an end in itself; that is our problem. Because we are accountable to be explaining what we decided, we are obsessed with being able to explain that rather than to get the best end result. That is our problem.
Q: But do you think there could be any solution to this at all. Realistically speaking, even if the whole method is changed you can’t deny that weak governance could happen even post a new method being put into place?
Gupta: That is true. So you need to be able to keep to timelines and be transparent about it. Transparency has an element of secrecy and privacy to it. To take a very crude example, railway reservations - there was huge amount of rampant corruption in them and today they are absolutely online and they are fine. So you need some amount of technology to be taking care of what you are collecting as feedback and thereafter, you also have to authorise people to have discretion. The discretion should not be that X was recommended then the file remains for three months, then it came back and then Y got recommended and then it went through the rounds. That is the issue.
Q: There were two or three specific things that an ex-banker who was in the selection committee said can be done. One he said, the selection committee can only select from the names who come, the weeding process and favouritism happens in the shortlist itself. So, can that process be transferred for instance to the RBI, if that can be taken out of the government. The government as a shareholder selects the chairman but that shortlist creation, can that be taken out?
Purwar: Some amount of subjectivity will always be there whether you take it to RBI or to the government. But having said that, RBI is one institution which is, I personally believe, maybe rightly or wrongly, that it is least amenable to any political interference. They are able to stand up, they are able to take very professional solid strong views and perhaps in the present circumstances giving a greater role to RBI in the selection process may be of help.
But again, it is a very short-term solution. Long-term solution has to be that the board, who is responsible for delivering results has today zero say as far as selection of CEO is concerned.
Gupta: I have just two short points to add to this. How do you make this better? Firstly, this is a great opportunity to clean up the system because there has been obviously wrongdoing that has been recognised, that is sought to be undone. And therefore, undoing it on a one off basis will only replace XYZ with ABC. We have to change the system.
A starting point is that each bank must get its own ED and CMD. You are not comparing apples to apples when you put the 25 PSBs together. You look at the selections today, how many from Corporation Bank, how many from Dena Bank, what is the percent of PNB, 5 percent of the banking industry. What is the CEOs coming from PNB, less than 1 percent. Likewise, Punjab and Sind Bank.
So what happens is subjectivity has a metrics. In that metrics, you rate people. Smaller banks typically will tend to rate people better. That is what I mean by saying the means become the ends. So when you tabulate on the tabular, whatever is the number becomes your decision. Why shouldn’t you be able to get a CMD and an ED from within your bank. State Bank is an outlier, outperformer and that is what happens in State Bank.
If you say that there is bias or there is a moral hazard in putting a CMD from the same bank then you should not be running that business. You should be able to find a CMD who is above the moral hazard and if he is biased in situation A, why is he not biased in situation B.
Q: This ex-banker who was making suggestions on how to improve the process also said that this selection committee of academics, the current selection committee only selects the shortlist. It doesn’t place them. The placing, whether the selected guy goes to IOB or BOI it is a world of a difference, that is done by the government. Should that be taken out, the selection committee sits, selects and places?
Purwar: Again, I will go to the basic theme. What is the responsibility the selection committee has as far as performance of individual banks are concerned. Is there any accountability for that.
Q: So then again the board has to select.
Purwar: Yes, the board has to select, the board has to have a say.
Q: How about lateral. I don’t think this current re-jig is going to include lateral at all. People from the industry - Shailendra Bhandari is available, is he going to be allowed as a candidate.
Gupta: You don’t need lateral, lateral is always welcome. The idea is not to keep talent out, the idea is not to have a closed pool. But if you put a man who have been in this situation for 15-20 years, you have a huge amount of domain expertise. As Mr Purwar said tenures are short, that is not going to be remedied in the short run and my view on this is - when it is public sector, when you are on a president appointed post then a long tenure is as dangerous. So really, a 3-5 years tenure is about what you should have, 5 could be too long. Mr Purwar has had an illustrious tenure. He had 3.5 years.
You can achieve everything, you set your agenda in six months and you execute thereafter. I beg to differ, long tenures are fine but what I am saying is that the cracks of the problem lies in being able to have the right guy there and the other part about performance is not questioning people. You question people seven years into their retirement on stuff that may or may not have been done by them. That is the other big problem that the PSB space is facing today but that is not the debate right now, the debate is about recruitment. Stick to the bank, promote from within the bank and yes, you were saying should the government have a say, I am saying the government should not be there at all. It should be a professional board that should be doing it.
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