PSU Banks going back to Government

The finance ministry has ordered the recasting of the boards of all listed public-sector banks, cutting down the number of shareholder directors by 50% while raising the number of government appointed “independent” directors.

Extremely Bad Decision as the government’s grip on public-sector banks will increase.

In a related development, the government has also withdrawn its own directors as well as the Reserve Bank of India’s directors from the management committees of bank boards. This key board committee is responsible for clearing all big-ticket loans that cannot be cleared by the CEO of a bank. The loan-sanctioning power of the public-sector bank CEO is limited to Rs60 crore at small banks and Rs100 crore at big banks. This reminds me of the series of co-operative banks that went bankrupt in between late 90s and 2002 because of involvement of corrupt directors.

Bank CEOs, in private, say that while such nominees are technically independent professionals, in reality most of them are political appointments and normally belonging to the party in power. For instance, one so-called independent director who is set to join a large Mumbai-based bank is Rani Satish, the former minister of state for Kannada and Culture from the ruling Congress party.

“On what basis do I remove a shareholders’ nominee?” asks a visibly frustrated chairman of a very large public sector bank, who says the timing of the government decision is unfortunate because public-sector banks need more outside expertise at a time when they are trying to compete more aggressively with private banks that can attract a more diverse board.

The terrible decision by government to recast public sector bank boards does not technically abide by the capital market regulator’s norms on independent directors on the boards of listed entities. In accordance with Clause 49 of the listing norms, all listed corporations should have 50% independent directors on their boards.

Hopefully the rating agencies like Fitch and Moody’s will downgrade India to RISKY category.