Will the BoM work?
Majority members in the board of management (BoM) are to be persons with special knowledge or practical experience in one or more matters specified in sub-section 2 of Section 10A of the Banking Regulation Act (1949). The maximum number of members of the BoM (say 12) is to be prescribed by the RBI
Pain point: Hard to find enough competent persons
Sitting fees for BoM members to be decided by BoD, subject to central bank cap
Pain point: Low sitting fees will be a hindrance
UCB CEO to be responsible for the management of the whole, or substantially the whole affairs of the bank, but shall be subject to the control and direction of the BoM
Pain point: Very cumbersome structure
Relationship between the BoD and BoM would be similar to the relationship between a supervisory board and an executive board. This is widely prevalent in many co-operative banks
in European countries
Pain point: Too esoteric an arrangement
is yet to spell out how the BoM mechanism is to be operationalised. Broad contours taken from Y H Malegam’s ‘Expert committee on licensing of new UCBs’ in 2011 which set the case for the BoM
The RBI’s Report on the Trend and Progress of Banking in India (2018-19) says that UCBs with deposit bases of up to Rs 10 crore formed the modal class in FY08, but the Rs 100 crore to Rs 250-crore bracket became the modal class at the end of FY19. This suggests an increase in the average deposit per account as well as an expansion of the customer base of UCBs”. This transition over a decade has come with its pains, and the fear is that an inability to set up a BoM can harm their business, given the reputational risk involved.
The larger UCBs with a total business size of Rs 20,000 crore (or which will be approaching this threshold in say, five years from now) will definitely seek to morph into universal banks. This is because the SFB model will call for them to exit current business lines. Both Saraswat UCB and Cosmos UCB are set to opt for the universal bank option, and are finetuning their plans for the life ahead. It makes no sense for these banks to set up a BoM in the interim.
No incentive to be on the BoM
A fallout of the Punjab and Maharashtra UCB mess is that few professionals want to be associated with the sector.
The central bank’s data shows that UCBs in the top-ranking categories – with ‘A’ and ‘B’ ratings – accounted for 78 per cent this universe. The share of UCBs in category ‘A’ has, however, declined in the last five years with a concomitant increase in category ‘B’ banks. The share of UCBs in category ‘D’ has remained in the range of 4 to 5 per cent in the last five years. But the RBI
does not link these ratings to the size of the UCB – those with Rs 100 crore being of immediate import as they have to set up a BoM.
“Why should I offer myself to be on the BoM of a UCB. I have no idea about the risk profile of these banks. After the PMC Bank blowout, these ratings are anyway under a cloud”, says an independent director who serves on the boards of a universal bank, and companies. In any case, being on the boards of banks (let alone a new creation: the BoM) is being seen by most senior professionals as not worth the headaches involved, given that directors are under stricter scrutiny.
In the case of UCBs, the hierarchy between the BoD and the BoM is diffused as well. It is not yet clear if both the BoD and BoM are to attract the provisions under sub-section 2 of Section 10A of the BR Act; or if the BoM is to be purely advisory in nature. The RBI’s notification says “the BoM shall exercise oversight over the banking related functions of the UCBs, assist the BoD on formulation of the policy and any other related matters specifically delegated to it by the Board for proper functioning of the bank”. And “in the event where the BoD differs with the recommendations of the BoM, it shall do so by recording, in writing, the reasons thereof”.
The BoM does not appear to be a bomb of an idea.