Functioning of Boards in PSBs in India Sunil Kumar Maheshwari & Ramesh Bhat.



This communication is based on the experience of four independent directors, including the authors, participating in the boards of various PSBs. It highlights serious systemic issues in the functioning of the boards. It has significant implications for the selection and assessment of directors on the boards of PSBs.

The recent fraud of a whopping Rs. 113 Billion in Punjab National Bank and many more defaults by large corporates has brought the focus on the functioning of public sector banks (PSBs). While PSBs were struggling to cope with gross non-performing assets (NPAs) and stressed loans under corporate debt restructuring (CDR) of nearly 20%, recent realization of systematic frauds over the years has made the situation very precarious for them. One cannot rule out many more undiagnosed frauds that might have happened in last few years. The common man in the country is fuming and tax payers are crying foul on such developments.

In the recent past asset quality review (AQR) initiative of Reserve Bank of India (RBI) was an attempt for cleaning the balance sheets of banks. However, it has caused stress in banks to maintain statutory liquidity. There have been different estimates of NPAs in different studies. Based on two stints in the boards of two different PSBs, we estimated that NPAs and CDRs in banks in India could be in the range of Rs 10 lakh crore and 14 lakh crore. Closure scrutiny of these accounts is likely to reveal larger malaise in the system. Such deteriorating asset quality indicates the problems with the governance of PSBs, especially the role of board members, top management, auditors and control systems.

The ability of a top-management team to assure the control of its organization is a fundamental concern for share holders. Agency theory is behind the idea that corporate managers should make shareholder value their primary concern, and that the boards should ensure they do. This is of high significance when either the ownership of large corporations is dispersed among thousands of stockholders or it is held by the governments in a democratic setup. It is difficult to identify and isolate individuals who truly assume the role of principals in these two types of organizations. Hence, the role of boards assumes larger importance to ensure non-shirking of responsibility by managers in PSBs in democracies like India.

It is in this context this communication was undertaken. The first author has served on the boards of two large PSBs. He systematically kept notes about the time spent by board members in the discussion of agenda items in board meetings. He also interviewed three independent directors on the boards of other PSBs. Collectively he and other three directors had served banks in the tenure of five different CEOs of PSBs.

Each interview was focused on identifying the reasons of NPAs, role of the board, relationship with auditors and the way board meetings were conducted in PSBs. Based on the interviews and first author's notes and observations, a detailed note was prepared and shared with the officials in Ministry of Finance. The first author also shared his findings with the Governor, Reserve Bank of India (RBI) and a few top officials in PSBs. Comments were sought from them. None of them mailed their...

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