Redefine the relationship

“The job of a peon or a clerk in Reserve Bank of India is more secure than its Governor”. Thus spake Y V Reddy, one of the most respected central bankers in the world. The same holds true of the Chairman of J&K Bank. This has now been proven twice over. 

In the last six years or so, there is no denying that the once gilt edged J&K Bank, like many other state institutions, has got corroded. The happened under democratic regimes, irrespective of the political parties in power. Taking advantage of this, successive Governors dispensations, on their own or on the behest of the Centre, erode these institutions.   

Sacking is no solution. Disgracing may be a deterrent, it is not a drug for the malaise. There is a structural problem that can’t be fixed by instrumentalist interventions of the kind that the state government did last week. These may be seen as administratively decisive, but are procedurally improper and systemically dangerous.

Punitive action against errant individuals or compromised layers of management and governance must be taken but without causing irreparable institutional damage. Especially when it is a financial institution.

Since the state government cannot dismiss the chairman, a surrogate way around was found: withdraw the nomination as a government director and use the articles of association to “infer” removal as chairman as a consequence. This is not only not correct but is also questionable. It violates the Banking Regulation Act of 1949.   

The RBI appoints the Bank chairman for a tenure without any riders. Post that the state government nominates the appointee as a government director on the board of the Bank. This is done to comply with requirement of the chairman having to be a government nominee as stipulated by the J&K Bank’s articles of association. Withdrawing the nominee directorship by invoking Article 69 (iii), cannot annul the appointment made under Banking Regulation Act which also lays down the procedure for removal.

Be that as it may. The deed has been done. Now the focus should be on what good can be made to come out of it. Can the dagger be used to perform a life-saving surgery?

By all means, unveil the politician-banker-bureaucrat-businessman nexus and bring them to book.  But also go beyond it, if it hasn’t to reoccur.

For that there is need to redefine the relationship between the state government and the Bank. This is required because J&K Bank is a unique bank; a bank sui generis. As such there are no readymade models to follow. 

There are three unique features. First it is the only bank in the country which owned by a state government. Second, despite the government ownership, under Section 22 of the RBI Act it is classified as an “old generation private sector bank”. Third, notwithstanding its private sector status as a bank, it is a government company. By virtue of this it comes under the ambit of the Comptroller and Auditor General of India even as it is regulated by the RBI. 

A consequence of this seemingly complicated structure – which incidentally has survived bank nationalisation of 1969 and 1980 and the mergers of 1993 — is that the Union Government feels the Bank is outside its ambit of control. So too does the state government. The Bank has no formal accountability and reporting structure either to the state legislature or to the executive arm of the government. This makes the whole relationship unstructured, nebulous and fraught with possibilities of misuse.  It personalises the institutional relationship with the chairman ending up being or being seen as a political appointee. It is this that needs to be changed.

For this to happen, the state government must get clarity on its own role vis-a-vis the bank. First, it must rid itself of the mind-set that it is the owner of the Bank. It is not. Post 1998, when the bank was publicly listed, the owner became the promoter. In addition to being a promoter, government is also the largest shareholder, at one time biggest borrower and a customer of the J&K Bank. These multiple relationship are mutually exclusive but can at times be conflicting. There is need for the state government to align all these roles strategically and operationally.

This network of relationships has to be synergised by bringing all these under the rubric of an enlightened stakeholder. What this means is that as a promoter, it should be responsible for the capital structure of the bank as required by prudential and regulatory norms. As a shareholder, the state government must watch the asset quality and ensure that the return on investment outstrips its inflation adjusted cost of its market borrowings. As a borrower, it must ensure that its cost of borrowing from the bank is lower than its bond yield. And as a depositor the efforts of the government should be to get a corporate bulk deposit rate.  Nothing of this kind of benchmarking even exists. This will set the rules for performance evaluation. 

Instead, the state government behaves like a “feudal” owner, acts as a “family” promoter, and functions akin to a “benami” shareholder! It is also an “un-informed ”customer and “desperate” borrower.

Second, having defined its own role, the state government must set out to build a Board that it recognises and respects. The Board, as the apex corporate governance body of the Bank, has to be the supreme authority; not the government not the chairman. It is an unstated principle that in the Board the promoter director is the first among equals. That should give government adequate comfort. 

In fact the biggest sham, if not a scam, perpetrated by the government is in the appointments to the Board. Even after being listed, the state government has put relatives, affiliates and friends of the political class on the Board.

Procedurally, even the independent directors are appointed with the approval of the state government at the level of the Chief Minister. This is unacceptable and must change. Independent directors must be selected through a formal process and both this process and their appointment should be a matter for the Board. The government should have no say in this whatsoever. This will be the biggest safeguard.

It is a good beginning to have a search committee for appointment of a non-executive chairman and a chief executive. The committee must be given a set of laid out criteria for selection. Right now there is none. It is equally important to fix the inter se hierarchy of the chairman and the top management with that of the state bureaucracy. For instance, the SBI chairman is deemed as equivalent to that of deputy governor of the RBI.

Along with this what is also needed is an expert group to redefine and corporatise the relationship between state government and the Bank. They key to crisis lies in institutionalisation of decision making and accountability of performance as a norm rather than as an exception. 

Tail piece:

The most dangerous aspect of the current episode is that for the first time J&K Bank has been drawn into the vortex of “Jammu versus Kashmir” and “Hindu versus Muslim”. This is not just sad but sickening. It is tragic to talk in these terms, but necessary to do so if only to dispel motivated rubbish. J&K Bank has, since 1938, seen 28 Chairmen; 14 from Jammu and 13 from the valley.

At present, the top management of the bank comprises twelve people; seven out of them are from Jammu; five from Kashmir and one from Ladakh! On the governance side, there is just one representative from the valley; four are from Jammu and another four are professionals from rest of the country.

To counter the incendiary slander that J&K Bank had become a Muslim bank, one has to stoop low and point out that only one board member is a Muslim! And of the 12 top management people, only four are Muslims. Pray, don’t fall prey to this propaganda.