Tamal Bandyopadhyay: Shakedown time

Nationalised banks will soon face instability at the top

On September 16, on the sidelines of a Ficci banking conference in Bangalore, Vittaldas Leeladhar, former chairman of Union Bank of India, hinted that his bank was considering acquiring a bank with an international presence. He had also mentioned that the merger would take a year to materialise.

Leeladhar, however, will not be heading Union Bank to oversee the merger; just a week after making this statement, Leeladhar moved to Mint Road to join the Reserve Bank of India as a deputy governor.

Last week, the Corporation Bank board gave its senior management clearance to look for a suitable takeover candidate. Following the board meeting, Chairman Cherian Verghese outlined his vision of acquisition saying he would like to cash in on the Corporation Bank brand and gobble up a bank of roughly the same size.

The acquisition is not a day-dream for this well-managed Mangalore-based bank. Not only is it adequately capitalised, the Life Insurance Corporation (LIC) of India, which holds a big chunk of the bank's equity, seems to be willing to put in fresh money for the acquisition.

Like Leeladhar, however, Verghese too may not be around to see his dream fulfilled; he is set to shift to Mumbai to succeed Leeladhar as chairman of Union Bank.

These are two symptoms of a growing malaise in the public sector banking industry "" lack of stability at the top. Foreign institutional investors (FIIs), which have been chasing bank stocks for the past one-and-a-half years, used to put the quality of risk management in state-run banks under a microscope. Now, they perceive the management as a bigger risk for these banks.

The reasons? One: The time spent by most of the chief executives of banks is insufficient to implement their vision. Two: Nobody knows how long it will take for the government to select the next CEO after the existing one retires or moves on.

In the interim period "" which can run to months "" a bank becomes an orphan. There have been examples of bank that have lacked both chairman and executive director for months. Naturally, all major decision-making comes to a standstill during this period.

Three: The functions of the top management of all banks revolve round the personality of the CEO. Once the incumbent CEO calls it a day, there could be a radical change in the bank's approach.

Finally, the top management of public sector banks is ageing. The average age of general managers "" some of whom become executive directors though few make it to the top "" is 55 years. That means that, with exceptions, the chairman's stint will continue to be short.

First, let's take a close look at the full list of retirees. Michael Bastion, chairman and managing director of Syndicate Bank, was the first to go last month. He is to be followed by Canara Bank CEO R V Shastry next month and Bank of Baroda head P S Shenoy in February next year.

Four more bank CEOs will retire next year. They are: Punjab National Bank's (PNB's) S S Kohli, Oriental Bank of Commerce (OBC) head B D Narang, Bank of India chief M Venugopalan (all in April 2005) and Dalbir Singh of Central Bank of India (June 2005).

Leeladhar's post has already been vacant since he has moved to the Reserve Bank. If Verghese steps into Leeladhar's shoes, then Corporation Bank top post will become vacant.

Among the big four banks, Bank of Baroda has the biggest FII stake "" 17.40 per cent as on June 30. In Canara Bank the FII stake is 13.43 per cent; PNB 12.82 per cent and Bank of India 5.50 per cent.

Among other banks, the FIIs hold 14.29 per cent stake in OBC; 13.81 per cent in Union Bank and 10.62 per cent in Corporation Bank. No wonder they are worried about the management of these banks.

There has been much speculation on who will go where. Should the executive director of a bank be promoted to the top post when the chairman calls it a day? Or will an existing chairman of a relatively smaller bank be an ideal candidate to head a big bank? There are no set rules for these appointments. It all depends on different pulls and pressures.

There could be occasions when the government wants to reward a bank chairman for doing good work by shifting him to a bigger bank. This way, an individual performer can be rewarded but the bank could be a loser, particularly if the CEO has started turning it around.

This is a sensitive issue. For instance, should the government appoint K C Chakraborty who has been appointed as an executive director of PNB as its CEO when Kohli steps down a few months later? Similarly, should H A Daruwalla be made the CEO of Oriental Bank of Commerce when Narang calls it a day?

If the appointment board rules in their favour, it will be opting for continuity. At the same time, it may end up denying several chairmen of smaller banks who have proved themselves elsewhere an opportunity. Even in such cases, the government must use its discretion.

For instance, V P Shetty has done a good job by turning around the sick Uco Bank in Kolkata. He has been at the helm of Uco for over four years now. O N Singh, chairman of another Kolkata-based bank, Allahabad Bank, has also been doing a splendid job.

But he has been on the assignment for about 10 months now. So there cannot be a uniform rule for both. The government has to strike the right balance between rewarding a performer as well as not denying a bank the services of a good leader who has started transforming it.

The best possible way to tackle this problem could be to catch the performers young and create a pool of talent that can be used to run the industry. There has been a move to appoint two executive directors at bigger banks.

This means the industry needs a larger pool from where both executive directors and CEOs can be sourced. Instead of interviewing 80 general managers for eight executive directors' post once in two years, the government can create a panel of over three dozen-odd senior managers that can be used to appoint CEOs and executive directors in 19 nationalised banks.

Seniority does not have to be the sole criterion for judging a banker's competence. The State Bank of India (SBI) dumped the seniority concept a few years ago and started picking executives for the CEO's post who would have a reasonably longer stint at the top.

Former SBI chairman Janakiballabh superseded half a dozen senior colleagues on his way to the top. The present chairman, A K Purwar, has followed the same path. What is more, taking a cue from the private sector banks, SBI has started identifying candidates with potential and grooming them informally.

If a highly bureaucratic SBI can do this, why can't the other state-run banking outfits? The choice of CEOs has to be impeccable at this juncture. The industry needs large-hearted, smart strategists who will not hesitate to put the interests of their institutions ahead of other considerations.

In any case, a large number of public sector bank heads will have to sacrifice themselves at the altar of consolidation over the next few years. After all, when two banks merge, you can only have one CEO.