More room at the top

GOVERNANCE: Parliament's approval of an amendment Bill last week paves the way for more board-level positions in public sector banks.

At least one public sector bank need not worry about having to build a cabin for an additional executive director. Traditionally, nationalised banks have only one executive director (ED) who reports to the chairman and managing director (CMD).

In 2002, when Bank of Baroda shifted its corporate office to the Bandra-Kurla Complex in Mumbai, it built cabins for two EDs.

The move seemed right on target when the Banking Companies (Acquisition and Transfer of Undertakings) and Financial Institutions Laws (Amendment) Bill, 2005 was approved by Parliament last week.

The Bill looks to increase the number of whole-time directors on the boards of nationalised banks from the existing two to four. Currently, their boards (barring State Bank of India) comprise two whole-time directors"" one CMD and one ED.

"In 1969, nationalised banks had two whole-time directors, but their balance sheet size was small. Since then, their balance sheets have grown more than 10 to 20 times. Hence the need for more whole-time directors," says H N Sinor, chief executive of the Indian Banks' Association.

With banking becoming more complex and nationalised banks entering new operations like insurance, mutual funds and wealth management, more functional directors are needed.

"Structure follows strategy. If the strategy is growth, the structure should support it," says A K Khandelwal, CMD of Bank of Baroda (BoB).

BoB, for example, has three Indian and seven foreign subsidiaries. It is four or five times the size of smaller banks such as Dena Bank.

Considering the size of the business, diversity of operations and the role overload, this move has long been pending, adds Khandelwal. How a larger pool of top managers would be used to streamline the functioning of a bank would depend on the needs and priorities of the bank.

Public sector giants such as ONGC and Indian Oil have an HR director. Since they employ in large numbers, human resource management is a key function.

"At the level of mid-sized banks, there is place for an executive director for credit and operations and another for HR, administration and inspection," feels Khandelwal.

Banks are also likely to concentrate divisions on the basis of particular operations. For example, international operations account for 16 per cent of BoB's total business and 28 per cent of its net profit, and hence there is need for personnel to oversee its international operations.

By and large, says Sinor, there will be functional divisions between directors (retail and wholesale operations, for instance).

This compares favourably with private banks. ICICI Bank has five whole-time directors on its board"" the managing director and CEO, two Joint MDs and two deputy MDs. Their portfolios (international operations, rural, retail and corporate, investor relations and finance) are clearly demarcated.

Having more people at the top level will also open new promotional avenues. "In every bank there are about 15-20 general managers (GMs). Only one gets to become ED. Now, at least three of them can aspire to become EDs," says Sinor.

When the Bill comes into force, banks with total business (deposits and advances) of up to Rs 100,000 crore will have two EDs and those with more business than this threshold are likely to have 3 EDs, say banking sources.

As of March 31, 2006, six banks were in the latter category"" Canara Bank, Punjab National Bank, Bank of India, BoB, Union Bank of India and Central Bank of India. According to Sinor, "About 50 new vacancies are likely to be created."

While this is thought to be a first step in the right direction, ensuring quality is equally important. "Management development in banks is a neglected area," says Khandelwal. With retail banking, international banking and treasury being part of modern banking, different skills are required and the process of selection is vital.

"To create executive directors for modern banking, management development should be integrated backwards to create a pool of deputy GMs and GMs," concludes Khandelwal.