Merger of public sector banks: Has governance been given short shrift?

Topics PSB mergers

illustration: Binay Sinha
The word “merger” was used only once in the recommendations by the committee headed by P J Nayak that reviewed the governance of boards of banks in 2014.

Even former RBI Governor Y V Reddy has been categorical in his assessment on the impact of the move to merge 10 public sector banks (PSBs) into four, when he recently told a television channel: “Merger won’t solve governance issues.”

The government while announcing the latest merger plans for PSBs did say the boards of banks shall get more freedom in the selection of independent directors and in deciding the role of board members. Among the measures were allowing banks to appoint chief risk officers at market-linked remuneration. But, the government’s silence on the road map to change the governance structure of PSBs make experts wary of the road ahead.

Experts point out that there has been no fundamental change in the governance structure of the merged banks. After the current round of mergers, there will be 12 large PSBs. “If anything, the risks have only increased as now they are concentrated with less number of individuals having greater powers, without any accountability,” says Shriram Subramanian, founder and MD, InGovern Research Services, a proxy advisory firm.

Many experts feel for governance and accountability to improve, the nomination and remuneration committee of the board has to play a key role in the appointment of directors, rather than the government or the Reserve Bank of India. This has to be linked to the reduction of the government’s stake in banks, they suggest.

The setting up of the Bank Board Bureau (BBB) — on the recommendation of the Nayak committee — was a step in that direction. However, experts are divided over the impact that the BBB has had on governance structures in banks. “The BBB is only a recommendatory organisation, and doesn’t have any real powers to bring about effective change in the governance structure,” says Subramanian.

However, Cyril Shroff, managing partner of law firm Cyril Amarchand Mangaldas, says the BBB has helped insulate the appointment of top management in PSBs. “This has helped improve the governance structure. However, additional reforms on this front are important,” he adds.

According to Hetal Dalal, COO, Institutional Investors Advisory Services, a proxy research firm, the mergers may bring a marginal change (in governance structure) in terms of how the performance of senior leadership is measured. “Given the ecosystem of PSBs, the change is unlikely to be perceptible from the investor’s point of view,” she adds.

However, some experts feel having bigger banks are a step towards better governance structure. “I believe efficiency in governance, and not the governance structure, is the issue. Efficiency should improve once we reduce the number of individual banks to have a seamless structure,” says Sandeep Parekh, founding partner, Finsec Law Advisors. Parekh feels the merger has to be the first step in a multi-step reform process.

The overhaul of the governance structure of these banks cannot be implemented in a few months and the legacy issues would continue to linger for a few years, he adds. The Nayak committee had recommended a three-phase overhaul of the governance structure over two to three years.

But, Shroff strikes an optimistic note. “The government has demonstrated a political will by undertaking governance reforms,” he says. Steps like giving non-official directors a role analogous to independent directors will enhance governance standards in banks, he adds. 

Experts feel the elongation of the tenure of directors and key managerial personnel will help engender better accountability and performance. “The ability to recruit a chief risk officer at market-linked incentives will also be critical in inculcating better credit underwriting standards and sustainable business practices,”says Shroff.

Experts stress the need for more specialists and strategists in PSBs. With the recent lateral recruitment of specialists into bureaucracy, it’s a matter of time before the same is done for PSBs, feels Jayesh H, co-founder, Juris Corp. The way forward is to build in accountability and demolish the culture of inaction, he adds.

Experts emphasise the need for continuity in approach given the sensitivity of the banking sector. “One does hope that the current approach is something not just being driven by the ministry of finance, and rather by the PMO itself,” says Jayesh.

As to whether the key recommendations of the Nayak committee will see the light of the day, experts remain divided over the issue. While some feel they are too drastic and may face practical implementation challenges, there are those like Shroff who are still optimistic. “The chief economic advisor was also a member of the Nayak committee and we may well see more of the recommendations being implemented,” he says.

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