April 5, 2016
‘Rs 1.14 lakh crore NPAs’. This daily refrain on Indian banks is a cause for widespread concern and reduction of business confidence. Is this a result of unfortunate errors of commission and omission, or a failure of governance, of the Boards of Directors of most public sector banks?
Examples of Governance failure abound and silence appears the best cover. For instance, nobody talks about CERSAI (the Central Registry of Securitisation Asset Reconstruction and Security Interest of India) – the sole Registry of information on immovable assets secured for loans issued by all Banks & Financial Institutions in India. A lender, wishing to lend against a prospective borrower’s immovable property, can enquire whether CERSAI has any record of any transaction about that property being secured with any other lender, before approving the loan. CERSAI should today be the first port of call for troubled lenders, humming with concerned and frenetic activity.
The reverse is true. CERSAI’s ‘Registrar and Managing Director & CEO’ retired on March 31, 2016, less than 7 months after being appointed. He was the seniormost former banker, in a leadership role at CERSAI, and was presumably recognized as competent, after he had held the position of COO of CERSAI for a number of years. Why he was appointed to the CEO’s position for a ridiculously tiny period, is a question that begs an answer. Another key position at CERSAI is their Head of IT. He too is a former bank officer on deputation from a public sector bank, likely to go back to his parent organization in a short while. To help him manage CERSAI’s IT systems, which are the entire basis of the organization, he has a tiny staff of less than 3 persons. The entire activity has been outsourced to an external contractor. This is certainly not a problem, were it not for the fact that the IT systems outsourcing contract also came to a close on March 31st. CERSAI has floated an RFP to upgrade the systems and appoint a new contractor but no decision has yet been taken. Now, there is no decision-maker who has any prior experience in the job or who has been groomed for any worthwhile length of time, and the organization which underpins the security validation mechanism for all loans against immovable property in India, is both headless and relying on a contractor who’s expired contract has just been extended. If this is how the government and its banks care for the security of their loans, a huge NPA bill is not surprising.
Why is this so? Five systemic reasons appear to be working together, not necessarily in concert:
- Total abdication of responsibility by the Banking system, including possibly the regulator.
- Apathy, lethargy and lack of accountability on the part of the bureaucracy.
- Lack of awareness, lack of time and lack of expertise at the political level.
- Total ignorance and before that a feeling of complete helplessness in the general populace.
- The Press? Fruitlessly and eternally engaged in sterile debates on meaningless matters.
Sadly, this is not an exception. Many more examples of such situations exist.
The Government, as the Rule-maker for corporate and business Governance, needs to practice before it preaches!
Good Governance would have meant that the MD would have been given a reasonable term, with a mandate to ensure upgradation and stabilization of systems that would provide CERSAI’s clientele a reliable service. Government would have invited the other investors in CERSAI, large public sector banks, to find an experienced and competent person to run an institution that is clearly designed to protect their interests.
For the private sector, this is a lesson in how Board Governance must not be done. The Board needs to do Leadership and Succession planning well in advance of need, with a plan B in place should plan A fail for any reason.