Quality Of Directors An Issue, Public Sector Banks Tell RBI Governor — BQ Exclusive

Top management of public sector banks, in a recent meeting with the regulator, flagged the issue of the quality and competence of the directors on their board and how it impacts the quality of governance, according to bankers aware of the matter.

The bankers, who spoke to BQ Prime on the condition of anonymity, met with the top brass of the Reserve Bank of India on May 22 in New Delhi. This was one of the issues raised by bankers during the meeting, which focused on governance and responsibilities of bank boards.

The chief of one of the large banks pointed out that some of the nominees that have been appointed to their boards may be experts in their individual areas but have no knowledge or understanding of banking or financial services.

This impedes discussions at the board level, where you expect a certain standard and quality of discourse, a senior banker said. The precious time of the management and board is wasted explaining basic concepts and this lack of quality causes weak boards, the banker said.

As the government is the primary shareholder in state-owned banks, with at least 51% shareholding, they appoint a majority of the directors on these boards.

Two bankers, present at the conference, pointed out that apart from government officials who hold ex-officio positions on the boards of state-owned banks, people with political affiliations with no knowledge of the technical concepts of banking are foisted on banks as directors.

Even as the RBI expects bank boards to step in with support and scrutiny on governance and build operational resilience, the truth is that most public sector banks have to function around the constraints of having such directors, the managing director and chief executive officer of a mid-sized public sector bank said.

While bankers said there is value in having people from diverse backgrounds on boards, it is difficult to understand why a marketing or medical specialist would be appointed to a bank board when what they needed was a technology leader who provides insights on innovation and fintech.

The government appoints these directors through a panel that follows specific selection criteria, according to a former banker who sits on the board of a large public sector bank and attended the meeting on May 22. There are instances, though, where other considerations override this criteria during appointments.

There is a need for the government to tighten this selection criteria as it is their prerogative as the largest shareholder in the public sector banking system, this former banker said.

Unlike the meeting with private banks on May 29, where the speech made by Governor Shaktikanta Das was made available on the regulator's website, the RBI has not yet released the contents of the speech by the central bank chief at the May 22 conference.

A copy of the speech by Deputy Governor MK Jain, which was delivered at both meetings, was released on Wednesday.

"Effective governance requires a competent and independent board, effectively overseeing the management by asking the right questions, formulating appropriate strategies keeping in mind the risk appetite, and establishing proper policies and procedures," Jain said in both meetings.