A V Rajwade: The SBI strike and banking autonomy

WORLD MONEY

If there is a need for Delhi to loosen its control over PSU banks, there is also a case for improving governance.

At the outset, I should confess to a personal bias. On the last occasion when there was an indefinite strike in SBI (1969), I was president of the union which had called it. To my memory, there has been no indefinite strike in the banking industry since then. Our 1969 strike was the first indefinite strike by employees with no protection under the Industrial Disputes Act. My one regret about that unique event "" we should have kept a day-to-day record of the developments.

But to come to the recent strike, first a comment about the inconvenience to customers: while many suffered hardships, the problem is that as employees, we would like to retain the right to strike "" but, as consumers we do not like others exercising it.

To me, in retrospect, the saddest part of the strike was how completely unnecessary it was; it also shows that autonomy for banks is only on paper. It is beyond me why the issue should have involved the finance ministry "" surely it should have been sorted out between the management and the union? This lack of autonomy in administrative matters in particular, has larger repercussions and is eroding the competitiveness of public sector banks in relation to the foreign banks as also some of the newer private sector banks. One sees a noticeable gap in the knowledge levels and practices in some of the newer areas of banking such as securitisation, derivatives, risk management, risk based pricing of services and so on, and significant space being vacated by public sector banks almost without a fight!

Unable to pay competitive compensation, they often lose some of their best officials to their competitors. Again, since the administrative norms do not allow specialisation, which most of the newer areas of banking require, they often find themselves lagging behind. Indeed, they are competing with one hand tied behind their backs. This is not a happy state of affairs, either for the public sector banks or, indeed, for the economy: after all, these banks control the bulk of the resources of the banking system, which is to be fully opened up for competition by 2009, according to the roadmap drawn up by the Reserve Bank of India.

At one time, there was a proposal to reduce government shareholding in public sector banks in order to give them more autonomy. Nothing is being heard about it now. On the contrary, successive finance ministers have reaffirmed that the "the public sector character" of the banking system (that is, micro-management by Delhi?) would not be allowed to be diluted. I do not recall any specific definition of the term, but an uncompetitive public sector is not good for anybody.

If there is a strong need for Delhi to loosen its control over public sector banks, there is also a case for improving governance. One major anomaly is that the regulator/supervisor, namely the RBI, also has nominee directors on bank boards. There is clearly a conflict of interest. Second, as banking becomes ever more complex and as the process of gradual deregulation continues, banks are being asked to refer a number of technical issues to their boards "" risk management policies, for instance. One often wonders what percentage of board members, many of them politicians' nominees, have the requisite background in finance to weigh many of the issues. In any case, the sheer volume of paper that goes to board meetings probably precludes any member actually reading the agenda "" I am told that one meeting's agenda often runs to a few thousand pages!

Senior management needs better grounding and awareness in mathematical finance. Little formal training gets imparted beyond the middle-management level. One reform the regulator may like to consider introducing in order to improve awareness of issues such as cost of capital, pricing and so on would be segmental reporting of profits. Segmental reporting would surely lead to more and better comparisons between operating efficiencies of different banks, benchmarking of performance, remedial measures and improvement. Rather than consolidation of banks, what is needed is specialisation of banks in specific business segments where they have an advantage.

To end on a personal note, the workmen staff union had not joined the 1969 strike but supported it from outside. After the strike was over, the late Mohan Majumdar, the president of the workmen staff union and I addressed the employees. Mohan babu laid particular stress on winning back the goodwill of the customers and repairing the strained relations with the management, particularly Talwar, the then chairman: he felt that, one day, it might be necessary for the two unions and the management to take a morcha to Indira Gandhi's house. Did he foresee 1975, and Talwar's sacking for not obliging some Gandhi family cronies? Quite possible: Mohanbabu did have that kind of strategic vision.

Email: avrco@vsnl.com