48 PSBs, Reforms & Bank Board Bureau
Stiffer Challenges Await the New Banks Board Bureau
Concept of BBB
The BBB—an autonomous body—was
intended to eventually transition into a Bank Investment Company (BIC) in line
with the recommendations of the Committee to Review Governance of Boards of
Banks in India headed by P J Nayak and was set up by the Reserve Bank of India
(RBI) (Nayak 2014). The BIC, when formed, will hold the government’s stake in
PSBs and function as an independent special purpose vehicle that would provide
the banks greater autonomy.
First BBB
When the BBB began functioning in
its initial form from 1 April 2016, the state of PSBs was much better though
asset quality woes had engulfed the system. Banking sector reforms were
reinforced when the government launched a set of measures, collectively titled
Mission Indradhanush, after deliberations at the first Gyan Sangam, a meeting
of the top leaders of banks that was conducted under the aegis of government
and regulatory authorities in January 2015. Since then, the identification,
selection, and nurturing of quality leadership for PSBs, as well as the
continuity of said leadership, has been under greater focus, with primary
responsibility for these tasks being entrusted to the BBB. Similarly, on the
recommendation of the P J Nayak Committee, the position of chairperson was
separated from that of managing director and chief executive officer (MD and
CEO).
Eminent professionals were
inducted for the post of non-executive chairperson, akin to the practice in
private banks. A few private sector professionals were also inducted at the
level of the MD and CEO in some large public banks to add talent to the PSB
pool. The idea was to provide the chairperson a longer tenure to pursue a
long-term vision for the bank, while the MD and CEO, a full-time bank
executive, could demit office on superannuation as per the service conditions.
This move had the potential to remove the limitations of the MD and CEO’s
short-term residual service while enabling the non-executive chairperson to
steer the bank to realise its long-term growth aspirations.
The recommendations were also
designed to improve governance by identifying the right talent for top
management positions that come with full-time board seats (chairperson, MD and
CEO, and executive director). Succession planning for leadership roles, and the
enforcement of codes of conduct and ethics were also a large part of the
mandate. In the realm of business issues, coordinated action to mitigate asset
quality woes, though not mandated, also stood out as an important and relevant
task. The task of developing differentiated strategies for raising capital
through innovative financial methods and instruments is a work in progress.
The limited tenure of two years,
perhaps, proved inadequate for the first BBB to accomplish its ambitious goals
and put PSBs on the desired growth trajectory while carving out a transition
plan to move from government shareholding to a bank-holding company. But, it
has provided the contours of a road map in its compendium of recommendations
that can form the basis to take the process forward (Rai 2018). More
importantly, the draft Governance,
Reward and Accountability Framework (GRAF), designed to mitigate the dangers of
high-risk-taking during good times and risk aversion during bad times, can
provoke further thinking that will help adapt and improve it.
Second BBB
After the two-year term of the
Banks Board Bureau (BBB) ended on 31 March 2018, the government reconstituted
it with a new team. The new BBB has the potential to resurrect public sector
banks (PSBs) and maintain continuity in its policy stances. It reinforces the
government’s commitment to reform PSBs, particularly at a juncture when many of
them are reeling under unprecedented operational stress. Given the challenging
mandate, it has to reinvent its strategic role through greater coordination with
all stakeholders, especially the Department of Financial Services (DFS). The
revamped BBB assumes the responsibility of continuing to stay dominant in the
banking space, with PSBs needing rejuvenation and moral support.
The new BBB has the distinct advantage
of having a clear-cut goal due to the preparatory work that has been done in
the past, though the challenges of PSBs have become aggravated and are more
daunting now. It may need a different approach or a strategic shift in its
stance. But, its biggest limitation will be the need to devise appropriate
strategies to win the confidence of the DFS, its biggest stakeholder. The new
BBB has to achieve full empowerment through better coordination and
relationship-building to guide PSBs towards the goal. The task is made trickier
by the fact that PSBs are already required to work under several regulators,
each with a different mindset, and, at the same time, cater to the increased
expectations of customers.
The new BBB may find PSBs in a
weakened operational state from how the first BBB would have found PSBs.
Guiding PSBs through such a weak state with the same level of empowerment could
be difficult. Therefore, collaboration with the DFS for speedy structural
changes and further strengthening—as well as serious introspection on the
mandate—may be desired. This will require winning the confidence of mandarins
on banking reforms. Therefore, it will be pertinent to discuss the current
state of some of the PSBs and design well-calibrated remedial measures to resuscitate
them, even though that may not be part of the current mandate.
Problems faced by Banks & Role BBB can play:
Prompt Corrective Action: In
order to improve the performance of banks that have been identified to be weak
and restore their operational efficiency, the RBI introduced the new Prompt
Corrective Action (PCA) format with built-in rectification measures, effective
from financial year (FY) 2018–19. The PCA measures the performance of
banks using various parameters and classifies them into three risk thresholds.
Each level denotes a degree of weakness ranging from risk thresholdI (less
risky) to risk threshold III (very risky). Among others, PCA measures three key
parameters: asset quality, net non-performing assets (NNPAs), and capital
adequacy ratio. NNPAs breaching the 6% level or capital adequacy ratio getting
close to the minimum threshold of 10.25% would be clear indicators of weakness.
It also tracks concurrent negative rate of return on assets (ROA) ranging from
two to four consecutive years. This results in banks posting losses after
turning RoA negative.
Based on such metrics, the RBI
has imposed PCA on 11 out of 21 PSBs so far. The guidance of the central bank
and the reprioritisation of their business activities may hasten their revival.
Such remedial measures, already imposed by the RBI, can be a good starting
point for the new BBB to understand the operational state of PSBs. Many more
PSBs may become subject to RBI surveillance under PCA when the operational
results ofFY 2018–19 are finalised and made public. The PCA also clearly
specified the consequences of the three risk thresholds and the action needed
at each stage. So, a forward vision can be articulated depending on the
progress in reviving PSBs. The remaining PSBs can test their performance
parameters and improve on them in time to avert the imposition of PCA.
Asset quality: Asset
quality has always been under focus, but it has been deteriorating rapidly ever
since an Asset Quality Review was undertaken by the RBI in September 2015 to
reduce the divergence between the banks’ classification of non-performing
assets (NPAs) and the central bank’s assessment. As a result, NPA levels zoomed
to a historic high. In order to provide an exit route to failed entities and
speed up debt resolution, the Insolvency and Bankruptcy Code (IBC), 2016 was
enacted, followed by the setting up of the Insolvency and Bankruptcy Board of
India (IBBI). All stakeholders are now engaged in coordinated action to resolve
debt and improve asset quality. Taking into consideration the stressed assets
in the special mention account, SMA-2 (with money overdue beyond 61 days),
stressed assets had reached ₹11.25 trillion by
December 2017, which was close to 14% of total assets. PSBs hold 90% of such
stressed assets. The state of asset quality will have far-reaching
implications on the business efficiency of PSBs. Hence, the new BBB has to
pitch in to coordinate the debt resolution process even though it is not part
of the mandate. The revival of PSBs will rest, in large part, on how asset
quality management gets streamlined.
Simplified debt resolution
system: In order to simplify the debt resolution process, the RBI has
introduced a new set of guidelines, effective on 1 March 2018, for the
resolution of stressed assets worth ₹ 2,000 crore
or more. The new stressed asset resolution framework may increase asset quality
woes in the short run, but a stringent resolution process will be required in
the long run. Having invoked the IBC, many PSBs are working in tandem with the
RBI, the IBBI, debt resolution professionals, and committees of creditors to
hasten debt resolution. But, many large stressed assets are entangled in
prolonged litigation, which is stretching timelines. A lot of legal issues
connected to the bidding process are yet to be sorted out. Foremost among these
are the two amendments made to the IBC and the issue of special dispensation
for stressed micro, small, and medium enterprises.
Implications of PNB fraud: The
infamous Punjab National Bank (PNB) fraud, followed by a series of loan-related
embezzlements, has highlighted the need to reinforce risk governance practices
and to improve the effectiveness of systemic controls. The gaping holes that
currently exist in operational risk management can jeopardise the sustainability
of banks. With their fragile systemic controls and high susceptibility to
frauds, PSBs will take a long time to win back public confidence. PNB is
struggling with the intricacies of the fraud and RBI has granted the bank the
special dispensation of one year to provision for the losses. Restoring
normalcy will be a tedious journey. Meanwhile, PSBs are losing market share
despite the fact that they continue to be the backbone of financial
intermediation, especially in terms of their outreach to the hinterland. The
revival of the economy, which is gradually limping back to normalcy after
demonetisation and the implementation of the goods and services tax, could be
debilitated if the role of PSBs is allowed to diminish further. Therefore, the
sagging morale of PSB employees needs to be revived in order to enable the
banks’ resurgence.
Private Banks
At a time when private sector
banks were standing out as exemplars of best practices in corporate governance,
the recent imbroglios at ICICI Bank and Axis Bank have flagged possible
conflicts of interest in their conduct. They have added new dimensions to the
weaknesses in the corporate governance of leading private banks. The ICICI Bank
is classified by the RBI as a Domestic Systemically Important Bank, which makes
the recent revelations a matter of great concern. In this context, the
observations of Standard & Poor’s about the impact of weaknesses in the
governance process on risk management need to be factored in.
In view of the weak operational
state of PSBs, the new BBB cannot isolate these issues even though they are not
listed in the mandate. Without getting involved in mitigating the risks of
inherent weaknesses, it will be difficult to nurture and improve the
effectiveness of the apex leadership. It has also to take up the task of
appointing independent directors to the boards of PSBs to make them strong and
effective. After appointing them, training them and conditioning their skill
sets to meet emerging challenges will be essential.
Going by the experience of the
first BBB, the bureau could face another formidable challenge in asserting its
anchoring position in the driving of the PSBs’ futures. The DFS may be
persuaded to fully support the BBB in transforming PSBs to derive the maximum
potential benefit from the eminent people on the team. Even revising or
modifying the mandate, which was flagged earlier, may be necessary to tackle
the current spate of challenges.
Its immediate task will be to
soothe the nerves of PSBs, which are caught between the pincers of prolonged
debt resolution processes and the implications of gaping holes in their
operational risk management. Maintaining the equilibrium between constantly
evolving guidelines and the possibility of their implementation at the ground
level requires a deep dive into the operational state of PSBs, failing which it
may turn out to be another set of good intentions of key stakeholders without
the desirable outcome. On the whole, a challenging task awaits the new BBB,
where seeking government support, application of foresight, and adapting a
flexible approach in grooming board functionaries of PSBs will be necessary to
achieve its objectives.
