It must serve as a catalyst for decisive banking reform
AT THE HEART OF THE PROBLEM IS A BROKEN MODEL OF GOVERNANCE WHICH RESULTS IN WEAK ACCOUNTABILITY
appointed them rather than seeing their fiduciary duty to the institution. Many Board, whole time Director and even CEO positions remain vacant for significant period. An archaic system of rotating Executive Directors and CEOS across banks results in lack of continuity of direction and culture.
As a result, it is a rare board that is able to drive a strategic transformation agenda; most lurch from quarter to quarter, crisis to crisis, reconciling multiple directions and perspectives from everyone including the finance ministry, RBI and parliamentarians; banks de-facto have two regulators, the RBI and the government. The Bank Boards Bureau that was intended to address some of these issues has itself been marginalised.
Another major factor for high frauds and bad loans is an obsolete approach to controls.
Japanese companies like Toyota taught the world that quality must be preventiondriven not inspection-driven. A similar revolution is needed within PSU banks. There is no point in closing the barn-doors after each horse bolts.
The fundamental organisation design has to change to create segregation of responsibility and eliminate the possibility of a couple of rogue employees creating havoc unnoticed.
Banks are f undamentally information processing entities and so they have to be re-architected with contemporary technology so that real-time monitoring and analytics can be used to detect anomalous behaviours and transactions and raise flags.
The audit approach must shift from being manual, decentralised, transaction driven and ex-post to being preventive, analytical and intelligent.
The current system of concurrent audit employing hundreds of auditors and driving very large fees for such firms has proven ineffective in detecting, let alone preventing, frauds.
Such a transformation is not easy; it requires a change of mindset, structure, processes and capability. It therefore takes time and talent and this is where lack of continuity of leadership really hurts.
A third fundamental issue is talent and culture. An unpalata- ble truth is while public sector banks have lots of good, bright and hardworking people, the lack of investment in developing talent for a really long period of time, and constraints on changing the HR rules in fundamental ways has created an acute shortage of specialists with expertise in areas like technology, risk management, fraud control or internal audit and an even bigger scarcity of leaders who are able to drive performance and change. Lateral hiring is not a solution for even select lateral hiring faces major resistance and challenges of integration.
Weak leadership and culture make it a monumental challenge to create a meritocracy or hold people accountable for performance and compliance.
This is why despite tons of policies and rules and the fear of CVC/CBI/CAG, punishing the perpetrators is hard.
As in the case of the 2G Scam or the Arushi Talwar murder, no one is ever to blame. Fixing this requires a very fundamental overhaul of the HR system.
Sadly, all of what I’ve said is an open secret in the banking system. The answer is not more accountants, more audits, more direction and more supervision but more decentralisation with more accountability.
The multibillion dollar question is whether such fundamental changes can be made without privatising some of these banks.
In theory it might be possible but public sector ownership puts a nearly-unsurmountable handicap in human resources practices, procurement and governance.
This is why eminent experts ranging from Arvind Subramanian to former RBI governors and senior bureaucrats advocate privatisation. India’s public sector banks are accident-prone by design. Another giant fraud, and hundreds of smaller ones, are inevitably being planned and executed at this very moment. There are only three things we don’t know. Where will it happen? When will it be exposed? How big will it be?
Time is running out. Past alleged mega-scams by Harshad Mehta, Ketan Parekh and Jignesh Shah provided the impetus for many important reforms in our capital markets. The Nirav Modi-choksi scam must serve as the catalyst for decisive banking reform by the government. In the words of our Prime Minister, it is time to reform, perform and transform.