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The PSU Bank Reshuffle And Ineffectiveness Of The Banks Board Bureau

A surprise reshuffle in the managements of two large public sector banks is emerging as a sign that the Banks Board Bureau (BBB) – a body set up by the government to improve the governance of public sector banks – maybe fast losing relevance.

Late on Friday evening, the government announced the appointment of new chiefs for seven public sector banks. The list of banks included smaller lenders such as Syndicate Bank, Vijaya Bank, Allahabad Bank, Indian Overseas Bank and Union Bank of India. Each of these banks were due for a management change or had been functioning without top management for sometime. What came as a surprise were the other two banks on the list - Punjab National Bank (PNB) and Bank of India (BOI).

PNB’s Ananthasubramanian was moved to Allahabad Bank and BOI’s Rego to Syndicate Bank, both much smaller than their erstwhile employers.

Also Read: Government Shuffles The Top Deck At Seven Public Sector Banks

Usha Ananthasubramanian took over as managing director and chief executive officer of PNB in August 2015. At 56, Ananthasubramanian had age on her side and has completed less than two years at the bank. Melwyn Rego, too, assumed charge of BOI only in August 2015, after a long stint at IDBI Bank.

Why then were they moved? And did the BBB, which was set up specifically to advise the government on top appointments at public sector banks, recommend these changes?

According to a person familiar with the development, the changes in leadership at PNB and BOI were neither recommended by the Bank Board Bureau nor discussed with it. The BBB had recommended a few names for leadership positions in the smaller banks, said this person while adding that some of these recommendations were redirected to the larger banks without consultation with the BBB.

A second person confirmed this and added that neither the banks nor Ananthasubramanian and Rego were given any prior intimation of the switch. An email was sent out with the new appointments with no indication of the reason behind the move, said the second person.

Both requested anonymity due to the sensitivity of the matter.

The first person quoted above added that the BBB and the government have in the past followed a different procedure for appointments at the larger PSU banks, which includes consultations with an external agency. In this case, that procedure was also dispensed with.

Calls made to Vinod Rai’s mobile phone were not answered and a message was not responded to. The BBB said in an email response “it has no comments to offer”.

Did Performance Justify The Switch?

Both Ananthasubramanian and Rego took over just when the banking sector clean-up was beginning. In the summer of 2015, the Reserve Bank of India (RBI) conducted an asset quality review (AQR) and asked banks to classify stressed assets appropriately. The impact of this was seen on bank balancesheets starting the December 2015 quarter.

Between the September 2015 and December 2016 quarters, PNB has seen a 123 percent jump in gross non performing assets (NPAs) while Bank of India has seen a 73 percent increase. Neither are out of line with the disclosures made by almost all listed public sector banks, where gross NPAs have doubled. In fact, atleast two private sector banks – Axis Bank and ICICI Bank – saw a steeper jump in NPAs over this period.

"The increase in NPAs being reported now cannot be blamed on existing managements since the stress has been building up for sometime and these are legacy accounts,” said Hemindra Hazari, an independent banking analyst. He added that these bankers may not have been there at the time of sanctioning the loans that are now stressed.

In the March 2016 ended quarter, PNB reported a heavy loss of Rs 5,367 crore as it decided to increase provisions against bad loans to cushion the balancesheet against future stress. In the three quarters since then the bank has reported small profits. In the case of Bank of India too, losses peaked in the March 2016 quarter. The bank has reported profits in the second and third quarters of FY17, the last fiscal. Neither has reported results for the fourth quarter yet.

At the stock markets too, PNB and BOI’s stock performance has mirrored that of the PSU Bank index, suggesting that neither of the two bank chiefs can be singled out for under-performance on parameters available in the public domain.

“Based on indicators available publicly there is no clear justification for the reshuffle,” said Hazari while adding that the government should consider clarifying the reasons behind the decision.

What Good Is The Banks Board Bureau?

A wider question raised by the incident is whether the BBB, which became operational on April 1 2016, is achieving its intended objective.

Vinod Rai, the former Comptroller and Auditor General of India (CAG) who came to be known for his independence during the United Progressive Alliance regime, was appointed the first chairman of the BBB.

The purpose of setting up such a body was to improve the governance and professionalism of bank boards. It was part of a two step process recommended by the PJ Nayak committee set up to review the governance of bank boards in India. The committee had recommended the setting up of a bank investment committee (BIC) which would hold the government’s equity in public sector banks. Since the setting up of a BIC needed legislative changes, it was suggested that a BBB be established in the interim to guide on management appointments.

PJ Nayak Committee Report (May 2014) The process of board appointments, including appointments of whole-time directors, needs to be professionalised and a three-phase process is envisaged. In the first phase, until BIC becomes operational, a Bank Boards Bureau (BBB) comprising former senior bankers should advise on all board appointments, including those of Chairmen and Executive Directors.  

In just the last one year, though, there have been two different instances that have undermined the independence and the effectiveness of the body.

One such instance was the appointment of a CEO at Indian Overseas Bank - a lender which has seen 22 percent of its loan book turn bad. The bank, despite its weak financials, had been functioning without a chief since June 2016 when Managing Director and Chief Executive Officer R Koteeswaran retired. The BBB had recommended a replacement to the government soon after the post became vacant. On September 1, 2016, Vinod Rai told Mint newspaper that the BBB had recommended a name a “long time back.” The government, however, has only now, one year later, confirmed an appointment for IOB. Moreover, R Subramaniakumar, who has now been appointed managing director at IOB was not the original choice made by the BBB, said the first person quoted above while adding that the first choice for that appointment was stalled. Subramaniakumar, however, was on the list of people cleared for managing director positions by the BBB in the current round, said this person.

There have been other instances where the BBB’s recommendations have been disregarded. In January, while speaking at an Assocham event in Delhi Rai promised variable pay incentives for public sector bank employees starting April 1.

“The BBB will revamp the compensation package of employees and introduce bonuses, employee stock options (ESOPs) and performance-linked incentives from April 1 this year,” said Rai according to a Hindu Businessline report on January 5.

That pronouncement, too, remains unfulfilled.

Rai, himself, is now dividing his time between the BBB and the Board of Cricket Control In India (BCCI), where he has been appointed as the chief of a four-member panel of administrators overseeing the cricket body.