RBI’s tough prescription for UCBs - 6 perspectives
Veteran cooperative bankers Satish Marathe, Pramod Karnad, Suryakant Patil, Vijay Mohan, Atul Khirwadkar, and Jayvadan Bodawala analyze the recent RBI guidelines relating to the appointment of MD/CEO, WTD, and CRO:
The Reserve Bank of India has recently framed new guidelines on the appointment of managing director / whole-time director for urban cooperative banks. It has said the managing director of a UCB shall function under the overall general superintendence, direction and control of the Board of Directors of the bank. The UCBs shall ensure that the MD/ Whole-Time Director shall be a graduate, preferably with qualification in banking / cooperative banking such as CAIIB / diploma in banking and finance / diploma in cooperative business management or equivalent qualification, or Chartered / Cost Accountant / MBA (Finance), or post-graduation in any discipline. A circular issued by the central bank in this regard specifically state that, the MD/ CEO shall not be holding the position of a member of Parliament or state legislature or municipal corporation or municipality or other local bodies.
RBI has also decided that all UCBs having asset size of `50 billion or above, shall appoint a Chief Risk Officer (CRO) by 31 March 2022 and set up a Risk Management Committee of the Board. The Board must clearly define the CRO’s role and responsibilities and ensure that he/she functions independently. The CRO shall have adequate professional qualification / experience in the area of risk management. In case the CRO reports to the MD/CEO, the Board or the RMC shall meet the CRO, without the presence of the MD & CEO, at least on a quarterly basis. Further, there shall not be any ‘dual hatting’ for CRO. RBI has also laid a number of other specifications in a couple of latest circulars to the UCBs.
In initiating these steps, the RBI feels it will help to professionalize operations and improve governance in urban cooperative banks.
We sought views of 6 leading cooperative bankers on these reform measures.
A welcome and
Satish Marathe, Founder Member, Sahakar Bharati, and Director, Central Board, RBI:
The guidelines with regard to the appointment of MD / CEO and wholetime director are welcome and timely. Running a bank, including an
UCB, is more complex and challenging than it was a few years back. Prescribing norms for appointment of MD/CEO and wholetime director will go a long way in professionalizing operations besides improving governance.
If one views the current scenario dispassionately, one will agree that the UCB sector needs executives who are qualified, experienced and who have enough exposure. While there may be some hiccups initially, in the long run this process would enhance credibility and inspire confidence among the general public, particularly, depositors.
Since, the appointment is being confirmed by the RBI, to an extent the MD/CEO would be independent and will have relatively more operational space. The provision for appointment of wholetime director (read executive director) though new in the UCB sector, will greatly facilitate succession planning in the concerned banks.
MDs/CEOs, who will have to demit office, and who will fit the norms, can be appointed as an Advisor to the Board or Officer on Special Duty for discharge of specific functions. To avoid, heart burning, such an appointee may directly report to the Chairman. All UCBs, particularly, large and medium sized, need to put in place risk management systems, processes and appoint dedicated, qualified and experienced officers as a part of risk mitigation. Appointment of CRO, is a first step in this direction. Role and functioning have been well laid down in the RBI circular. Though today it has been made applicable to UCBs with asset base of `50 billion, all scheduled and medium sized UCBs should initiate steps to emulate and implement the guidelines
for strengthening the UCB sector.
Being non-political should be the eligibility for Director/ Chairman
Pramod Karnad, Administrator, Beed DCCB, Maharashtra and Former Managing Director, Maharashtra State Cooperative Bank:
Some bigwigs, especially politicians, have tarnished the image of UCBs as they have exploited the banks for their selfish motives. Some of them have siphoned off funds, some have made UCBs recklessly lend huge funds to projects belonging to their friends and relatives that turned into NPAs. Some of them have done over-recruitment, some have acquired software / hardware on unwieldy terms, proving it to be white elephant and eating into the profits even with huge AMCs.
RBI is now coming down heavily on the entire cooperative banking sector because of these underhanded dealings of some. Cooperative banks, being state subject, are left to the state government concerned for financial aid if anything happens. PMC Bank, CKP Bank, etc, are examples. On the other hand, PSUs banks are protected by the Government of India as we saw in case of Punjab National Bank. Even private sector Yes Bank was bailed out by the central government immediately, but PMC is yet to get support.
What I mean to say is that cooperative banks are expected to be funded by the state government in emergency. Nanded DCCB was funded by the Government of Maharashtra with `50 million share capital when it had a negative net worth. But now its coffers are empty. DCCBs like Nagpur, Wardha and Buldhana in Maharashtra are still sinking despite some initial funding by the state government and NABARD. How long RBI will wait in such cases as it is expected to be protecting interest of depositors!
Basically, how many UCBs have posts of wholetime director as per their bye-laws? How many UCBs have CEOs having political background as ex-MP or MLA or municipal councillor? The answer is none. So, RBI is just pretending to be making these changes to prevent politicians to be part of the management of UCBs. What RBI is really expected to do is to put this clause for the eligibility of becoming or contesting for the directorship or chairmanship of UCBs.
In fact, DCCBs need this discipline and I strongly feel that DCC banks should be de-politicised. RBI may ban present or past MPs, MLAs, corporators, Zilla Parishad members from becoming a director in a DCCB. Hope RBI dares it to do it.
RBI consolidates command on management of UCBs
Suryakant Patil, Ex-President and Director, Shri Veershaiv Co-op Bank:
It has been the endeavor of the Reserve Bank of India consistently in the past to bring in professionalism in the management of UCBs. With the recent amendments to the Board of Management, RBI has brought in a new set of norms for appointment/ re-appointment /continuation of MD/ wholetime director in a UCB, their eligibility, tenure and procedure to be followed. The RBI has been specific to ask UCBs to form a Nomination and Remuneration Committee (NRC) of 3 members from among its Board of Directors, who shall enact the process of such an appointment, as prescribed by RBI.
Some recent happenings i n the cooperative sector, which has indicated that even inspecting authorities fail to locate and identify the dark and evil side of the system. It is but natural for RBI to enact measures to seal the negative possibilities in a phased manner.
The whole intent of RBI behind this move is clearly to imply and apply the following:
■ that it will take some time for UCBs to have professionalism brought within their board of directors ■ that it is the MD/CEO who actually manages the UCBs in all respects
■ that a non-qualified or improper MD/ CEO is the sole reason for failures of UCBs that a weak and dishonest MD/CEO can be influenced by an unqualified board of directors, which adversely affects the health of the UCB that most UCBs do not have effective system and control in their administrative set-up
■ that most UCBs do not have proper assignment of responsibilities and accountability to handle cases of frauds and failures
■ that now onwards, RBI will have proper oversight as it will have control on the people at the helm of the UCBs
■ that UCBs below `1 billion deposit size do not have the required capability to employ professionals of high caliber; the future will see mergers and amalgamations.
The provision for having a Chief Risk Officer in place apply to banks above `50 billion business. Though a hard pill to
digest for the sector, it seems inevitable. It can also see an end of the road for even some of the good UCBs. While welcoming the steps, it is also for the RBI to put in place an appreciation policy which guides and encourages the better players in the field of cooperation. Also, RBI should give equal opportunities to good UCBs at par with PSU and private banks in all the schemes of Union government, to motivate the performers in this sector.
Provide voting right
Jayvadan Bodawala, Director, Surat People’s Cooperative Bank:
There is a need to provide voting rights to the MD/CEO of UCBs, which has hitherto been an unacceptable idea for the boards of directors. The boards felt the MD/CEO has to work under their supervision. Remuneration is a big problem as talent does not come cheap. It is difficult for banks to be managed by unprofessional and underqualified managers. There is unrest among staff in UCBs. Any problem raised by the board will now be sorted out by the RBI.
Overlooking ‘disqualification’ can be problematic for UCBs
Atul Khirwadkar, GM and CEO, Kalyan Janata Sahakari Bank (personal view):
We all, especially at UCBs, are aware that with the passage of Banking Regulation Act amendment, the situation for UCBs is dramatically changing and those who are not reconciling with these changes, are likely to face considerable difficulties.
I am expressing my view on the latest guidelines issued by RBI on CEO/ MD/wholetime directors/BOM in one go. These guidelines are nothing but reinstatement/refreshment of couple of earlier circulars, issued in 2013 just around the time when UCBs went in for the constitutional amendment 97 in their bye laws. Somewhere in 201314, the RBI for the first time stated that the CEO/GM of the bank will be treated as Managing Director or by whatever name he is called. Some UCBs during that time amended their bye laws to be in line with the requirement of 97th constitutional amendment and included the definition of GM/CEO on par with MD.
That being the practical position prevailing, now what changes is the perspective on account of amendments in Banking Regulation Act due to which certain requirements have come up for compliance. For example, the “fit and proper” criteria are now applicable to all the urban cooperative banks, which was previously applicable only to multi-state cooperative banks. There is nothing new about this fit and proper criterion. We all know that criterion.
In line with the same, Board of Management has become applicable prior to 30 June 2021 and UCBs must constitute a Board of Management, the details of which have already been described in the relevant circulars.
What is significant and critical is the qualification and disqualification criteria prescribed for a person to be a member of the board are equally applicable to the members of the Board of Management. What this means is that UCBs have to ensure that an outside person who qualifies the criteria for becoming a director of a bank, only can be inducted into the Board of Management. Many banks are overlooking this and can cause difficulties for them in the times to come.
As far as MD’s tenure norms are concerned, there is a period of 15 years that has been prescribed. And there is no clarity as to how to count the 15 years - whether to count the period of 15 years from the date of the circular or from the date of appointment of CEO.
To me, it appears that the 15-year period has to be applied from the date of appointment of CEO in the UCB.
However, the technical glitch builds up even in this concept. The RBI itself has equated the CEO with Managing Director in 2014. If this interpretation is far-fetched, it may mean that the 15-year period has to be counted from the year
2014 provided the person is CEO in 2014.
As f ar as the CEOs, who are completing15 years as CEOs in their bank are concerned, they must undergo a cooling period of 3 years before becoming eligible for reappointment.
This issue is causing some confusion among urban cooperative banks.
To me, the answer is simple. If there is a substantial residual service life remaining with the CEO, then the bank can appoint him as an Advisor to CEO for a 3-year’ period and after this, he can be reappointed after lapse of a cooling period. This I say because it is difficult to get a CEO from outside, who may or may not gel with the bank and could create specific transition issues. To avoid this, the best bet is to retain him as advisor and make his deputy a CEO for a short duration, which will not cause earthquakes in the bank. Banks should always ensure that an internal person heads the organization as he is better placed to understand the bank and its philosophy. That is the story with all the leading UCBs.
These norms, now under discussion, were a foregone conclusion. As usual, many U CB sf ailed pro actively to assess this.
This is the beginning of the end of cooperative banking
Vijay Mohan, Chairman, Janata Cooperative Bank, New Delhi; and Chairman, Delhi Urban Cooperative Banks Federation, New Delhi (personal view):
Do you think we, the UCBs, have any option to make suggestions or reject the RBI’S circulars whether the instructions or directions go in favour of the UCB’s or against them? As far as keeping UCBs out of the control of politicians, that is no post is allowed to be held by any politician, is concerned, I think this is a commendable decision. But as far as the appointment of MD or CEO is concerned, I feel that should have been left with the Board of Directors. Just to remind you, RBI has already forcibly formed the Board of Management, creating problems and financial burden for UCBs. Precisely speaking, I feel that this is the beginning of the end of cooperative banking sector. May God Help Us.