A pedestrian walks past State Bank of India and Canara Bank automated teller machines in Mumbai (Photographer: Adeel Halim/Bloomberg)

Corporate Governance In State-Run Banks To Make Boards More Effective, Says Study

Public sector banks should continue to strengthen governance framework to make their boards more effective, and also tighten their human resource policies to increase specialisation levels of their staff, a study commissioned by Indian Banks’ Association said.

“Public sector banks need to further fine-tune corporate governance framework to make the boards and associated governance practices more effective,” the performance report prepared by Boston Consulting Group said.

Several steps have been taken to enhance quality of selection and length of terms of senior leadership, the report said, adding that specialisation in the banking sector is increasing and current framework for recruitment will have to be modified.

Highest quality talent from diverse streams have to be attracted to play leadership roles at various levels in state-owned banks, and retained for longer tenures, it said.

From NPA Recognition To Early Warning Systems

As recognition of non-performing assets is almost complete, state-owned banks can now shift their focus from recognition to early detection of emerging stress, much before the default occurs, the report said.

Recognition of stress has helped banks to create appropriate provisioning to absorb future losses arising due to NPAs, it said. Public sector banks have made provision of Rs 8.12 lakh crore since 2014-15 till December 2018, according to the report. Provision coverage ratio of the state-owned banks has improved from 46 percent by the end of 2014-15 to 68.9 percent by December 2018.

“The stress in all the banks because of the reforms undertaken have gone down,” said Financial Services Secretary Rajiv Kumar at the launch of the report. “So (NPAs) are not only recognised but fully provisioned.”

Gross NPAs have shown a reversal trend, and reduced from Rs 8.96 lakh crore by the end of 2017-18 to Rs 8.64 lakh crore as on December 2018, the report said.

PNB Ranked Highest

Fraud-hit Punjab National Bank has been ranked the highest amongst other state-owned banks based on Enhanced Access and Service Excellence reforms implemented by the government in January 2018.

“The bank which suffered both in terms of finance and transiently in terms of reputation because of a fraud and in nine months had to set aside Rs 14,000 crore for bad assets, rapidly transformed itself into an evolving institution and, after a period of nine months in the last quarter declared a profit,” said Finance Minister Arun Jaitley after presenting the award to the bank.

The rankings assigned by a study by Boston Consulting Group and Indian Banks’ Association based on EASE reforms agenda focusses on six themes which are:

  • Customer responsiveness,
  • Responsible banking
  • Credit off-take
  • Udyami Mitra for MSMEs
  • Deepening financial inclusion and digitalisation
  • Developing personnel for brand PSB

Punjab National Bank was ranked first in three out of six themes and secured the first rank based on its performance on the parameters for EASE Reforms index, as on December 2018.