RAVI VENKATESAN
America has its shootings. India has her bank scams. Both happen with monotonous regularity. In each case there is pouring of outrage after every incident. Accusations and blame fly. So-called experts expound stridently in the media. The government and regulator promise no stone will be left unturned to bring the perpetrators to justice and fix the system. Within a few days, the nation’s attention will drift to another crisis. And then it will happen again. And again. And again.
Why are our PSU banks so vulnerable to fraud and bad loans?
The famous American bank robber Willie Sutton, when asked why he repeatedly robbed banks, replied with honesty, “Because that’s where the money is”.
So as long as fraudsters know that there is easy money and no consequences for stealing, our banks will be robbed repeatedly. Our banks are accident-prone by design and need fundamental changes.
The diagnosis, remedies and way forward have been laid out many times but with particular clarity by the PJ Nayak Committee in 2014; however, the recommendations have been only partially and sometimes half-heartedly implemented.
Recapitalisation with half measures and band-aids simply won’t work. They are tantamount to rearranging deck-chairs on the Titanic. Privatisation of at least a few big banks is probably the only solution despite the many vested interests that would oppose this.
At the heart of the problem is a broken model of governance which results in weak accountability. The bureaucratic model for governing the country is not an appropriate one for governing banks in a fast-changing environment. The Boards of PSU Banks are emasculated entities with little authority. Boards do not appoint the CEO or the executive directors nor do they have the authority to set targets and manage performance.
As a result, public sector bank boards do not have the single most important tool to perform their fiduciary duty. Boards themselves largely comprise of nominees of the government and often lack the experience and expertise to govern these complex institutions. It is not uncommon for nominee Directors to think through the prism of who