Wanted: A few good men

Raghu Mohan

On November 22, Reserve Bank of India (RBI) deputy governor Vepa Kamesam, towards the end of his speech on corporate governance at the Administrative Staff College of India (ASCI) in Hyderabad, drew attention to the beautiful words of Benjamin Franklin: “A little neglect may breed great mischief... for want of nail, the shoe was lost; for want of shoe, the horse was lost; for want of horse, the rider was lost; and for want of rider, the war was lost.”

And if leading players in the financial markets are to be believed, banks and state-run banks, in particular, may lose the war if they do not buck up on this front. More so, on the critical side of capital. Unchronicled is the fact that banks have also been slow in waking up to the issue of corporate governance. And recent regulatory abuses in the banking system have only bought this aspect into sharper relief.

Corporate governance principles in banks are exhaustive, and draw in main from the Sir Adrian Cadbury and Kumar Mangalam Birla committee reports; and for banking, the Basel Committee. Read this along with the report by the advisory group on ‘Transparency in Monetary and Financial Policies’ chaired by ASCI chairman M Narasimham with former RBI deputy governor Dr SS Tarapore; and an advisory group one on corporate governance itself by RH Patil, and one can get the big picture.

Just how exactly does corporate governance work in a bank? Audit, investment, compensation and nomination committees are independent of the board. Then, there are specifics like in internal lending to employees being limited to that consistent with market norms; that these should be reported to the board; and that preferential advances should be curbed. However, it is well-known that despite all this, financial incest is practised.

Bank of India chairman and managing director KV Krishnamurthy is categorical that, in general, the level of corporate governance in state-run banks is higher than that in the private sector. “The state-run nature ensures that the board comprises of the competent, unlike in the private sector wherein board seats can be manipulated.”

Mr Krishnamurthy goes on to add that the execution of corporate governance policies is also dependent on the chief executive and senior functionaries.

Dr Tarapore though is critical: “All talk of corporate governance in India is bogus. Our system is opaque. Take board members. In the UK, you need to take an exam to qualify as one. Here, pre-eminence in a field or public life is good enough. Our bank boards have people like that. Again, just because you can wax eloquent on a subject does not mean that you are good at executing it.”

Others like noted chartered accountant, Shailesh Haribhakti, who is chairman of Assocham sub-committee on corporate governance, and chairman of the local advisory board of the Bank of Nova Scotia, give a slightly different view: “It is important that facts are marshalled, reported and presented to the board so that members can deliberate in a meaningful manner. There is no point having people of merit on the board and wasting their time drinking tea.”

And the very state-run nature of these banks is seen as not being conducive to corporate governance for reasons well-known. Sample this: a decade after the first Narasimham Committee report suggested that the banking division be done away with, it still continues. The BoI honcho is of the view that there is no interference, and that recommendations carry little weight. That credit-appraisal is everything.

Morgan Stanley’s vice-chairman P Krishnamurthy differs: “It (banking division) is out of place in today’s context. You have the RBI to regulate banks.” He adds that it is a well-known fact that there is interference in the working of banks, and at a recent seminar on banking and finance, told this writer that lip service to corporate governance is the order of the day.

“There is no point referring to the Cadbury Committee and the Kumar Mangalam Committee reports and including all this as part of a bank’s directors’ report. You have to act. Execution matters. In this country, 10 years after the 1992 securities scandal, you still have cases pending. It is better if one were to decide if there was a scam at all in the first place!” says the JM Morgan Stanley vice-chairman. SB Billimoria & Co’s YH Malegam also pointed at the seminar that regulation needs to be implemented, and there is no point just having good laws.

Bankers are of the view that what makes corporate governance very critical is that it is just not a question of being perceived as a good corporate-citizen. The Centre has made clear its intent to reduce stake in state-run banks to 33 per cent. The RBI in its latest Report on Trend and Progress of Banking in India (2000-2001) says that state-run banks, other than the three weak banks — Indian Bank, United Bank of India and Uco Bank — will require Rs 10,000 crore by way of capitalisation over the next five years. Most say this is an underestimation as the Narasimham Report-2 had cited the same number in 1998! The RBI warns of recapitalisation affecting the fisc. The option is to hit the bourses.

Senior financial sector experts are firm that corporate governance will play a key role if this is the preferred route. “Stock prices are driven by perception. I am not saying a languishing scrip means that there is no corporate governance. But it is a factor. Look at some of the bank-scrip prices. The valuations reveal what investors think on corporate governance,” says JM Morgan Stanley’s Krishnamurthy. He should know after being involved with HDFC Bank’s $172.5 million ADR issue and the merger-valuation of ICICI Ltd with ICICI Bank.

Says Mr Haribhakti: “A bank is a custodian of public wealth. A trustee. In an inherently capital-deficit country, it matters a lot that banks have corporate governance up and running. I am a strong votary of privatisation. Let it be a people’s thing — not private- or public-sector. And if you want the public to invest, corporate governance matters.”

There are other issues here. Mr Kamesam is of the view that “the bank’s board of directors and senior management are ultimately responsible for the performance of the banks.”

The story so far has been that not a single bank board has been removed for lack of performance. “At best, the CMD’s tenure is not extended,” points out Dr Tarapore. It also brings in another aspect: the continuation of RBI directors on bank boards. Dr Tarapore, has been a strong votary of doing away with this practice. “I used to sit for the State Bank of India (SBI) board meeting in the morning and announce an interest rate hike in credit policy later in the day. It needs to be understood by all that regulatory function is not the same as a proprietary one.”

Others agree. Says Mr Krishnamurthy: “I do not see any need for an RBI director on the board. You are party to a decision and then your inspectors come in... but, I have no issue with the government directors. The Centre is a stakeholder — 51 or 33 per cent is not an issue — and a board seat is entitled to them. Of course, you may well argue that the CMD too is a Centre’s nominee.”

Most admit that an umpire cannot be a player. “First of all, the banking division has no place. Then, you do away with RBI directors on bank boards. I do not see any reason why the RBI should have a place on the SBI board. All this affects corporate governance. If you want to know as to what is going on at SBI, call the chairman. I think it is a waste of time to have an RBI member on the SBI board,” are the hard words of Mr Haribhakti.

It is time now that all take a call on what is to be done to enforce corporate governance in banks. The stakes are too high. It would be worthwhile to dwell on Mr Kapesam’s closing remarks at ASCI: “... it only takes a small hole to drown a big ship.”