As you enter the head office building of many public sector banks, a strange sign will greet you. It will read, ?If anyone asks you for bribe please report him to the bank?s CVO.? Just that simple sign gives it away. Do we believe that Citibank?s head office building in Manhattan will bear the same sign? When Citibankers are arguably making bigger loans than their public sector bank counterparts, why don?t they need a similar sign or a similar officer?
This is because in private organisations, there is always a simple but effective metric of performance?profit. If a management does not deliver profit, it is asked to go. At the time of nationalisation, this simple contract was changed for public sector banks (PSBs). They were expected to mobilise household savings in the form of deposits for lending money to the government (as SLR) or for approved priorities covered under either the priority sector guidelines or credit authorisation scheme. Bank chairmen were feted for meeting priority sector targets and the consequent bad loans were accepted as part of the programme. In such a scenario, was individual turpitude?bad decisions for personal profit?to be expected? Back then, it was not that these financial services executives were paid that poorly relative to the market, but that they could be tempted. To curb this, the government came up with a highly evolved oversight mechanism and defined procedures for every commercial contract?just read the CVC manual. The business environment was controlled, slow and inefficient. Banking was largely an allocation business of extremely scarce credit in a license raj environment, where government chose business winners and losers through the allocation of prized licences. Profit was an accounting outcome of pursuing other targets. Adherence to procedure was sacrosanct and took precedence over any other commercial or business outcome. Thus, managers? performance could not be objectively measured. If they followed procedure or did nothing, they could never be fired.
Today, market competition in the financial sector is fierce, though not fair. Since liberalisation, banks and insurance companies are expected to perform well primarily on commercial grounds. All PSBs have minority shareholders watching share prices. Banks go to the market to raise funds, and they compete for the right to offer funds and services to creditworthy corporates and individuals. The insurance monopoly in life is over, and general insurers are in a battle againstaggressive new entrants. The ministry reviews banks and insurance companies in comparison with private players on commercial metrics.?The simple profit metric is back in vogue for public sector financial entities.?Yet, the existence of the current oversight structure, a legacy of a bygone era, accords priority to procedure over business logic. It creates a culture of decision avoidance and delay. In a market where some segments are growing at over 35%, loss of share in one year creates a serious competitive disadvantage. The key success factor in such an environment is speed. This is true in hiring premises to house a retail hub, buying a technology platform, hiring people and more generally in doing business. This, together with the great rise in salaries over the last decade, whereby variations across ownership forms have gone from being relatively modest to becoming clearly immodest, has made the Indian financial sector a private market for all private and foreign operators in India. They have a structural advantage in decision-making, and if that fails, they can hire the best of the poorly paid public sector managers. A strange outcome for successive Indian governments purportedly supporting the public sector!
Is there a way out? Yes. Turn compensation market-related, and give the CVO a decent burial. Overnight, we will see an increase in financial sector competitiveness across ownership forms. Not such a bad thought, is it?
?Janmejaya K Sinha is managing director, Boston Consulting Group India. These are his personal views