“The job of a peon or a clerk in Reserve Bank of India ismore secure than its Governor”. Thus spake Y V Reddy, one of the most respectedcentral bankers in the world. The same holds true of the Chairman of J&KBank. This has now been proven twice over.
In the last six years or so, there is no denying that theonce gilt edged J&K Bank, like many other state institutions, has gotcorroded. The happened under democratic regimes, irrespective of the politicalparties 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 isnot a drug for the malaise. There is a structural problem that can’t be fixedby instrumentalist interventions of the kind that the state government did lastweek. These may be seen as administratively decisive, but are procedurallyimproper and systemically dangerous.
Punitive action against errant individuals or compromisedlayers of management and governance must be taken but without causingirreparable institutional damage. Especially when it is a financialinstitution.
Since the state government cannot dismiss the chairman, asurrogate way around was found: withdraw the nomination as a governmentdirector and use the articles of association to “infer” removal as chairman asa consequence. This is not only not correct but is also questionable. Itviolates the Banking Regulation Act of 1949.
The RBI appoints the Bank chairman for a tenure without anyriders. Post that the state government nominates the appointee as a governmentdirector on the board of the Bank. This is done to comply with requirement ofthe chairman having to be a government nominee as stipulated by the J&KBank’s articles of association. Withdrawing the nominee directorship byinvoking Article 69 (iii), cannot annul the appointment made under BankingRegulation Act which also lays down the procedure for removal.
Be that as it may. The deed has been done. Now the focusshould be on what good can be made to come out of it. Can the dagger be used toperform a life-saving surgery?
By all means, unveil thepolitician-banker-bureaucrat-businessman nexus and bring them to book. But also go beyond it, if it hasn’t toreoccur.
For that there is need to redefine the relationship betweenthe state government and the Bank. This is required because J&K Bank is aunique bank; a bank sui generis. As such there are no readymade models tofollow.
There are three unique features. First it is the only bankin the country which owned by a state government. Second, despite thegovernment ownership, under Section 22 of the RBI Act it is classified as an”old generation private sector bank”. Third, notwithstanding itsprivate sector status as a bank, it is a government company. By virtue of thisit comes under the ambit of the Comptroller and Auditor General of India evenas it is regulated by the RBI.
A consequence of this seemingly complicated structure –which incidentally has survived bank nationalisation of 1969 and 1980 and themergers of 1993 — is that the Union Government feels the Bank is outside itsambit of control. So too does the state government. The Bank has no formalaccountability and reporting structure either to the state legislature or tothe executive arm of the government. This makes the whole relationshipunstructured, nebulous and fraught with possibilities of misuse. It personalises the institutionalrelationship with the chairman ending up being or being seen as a politicalappointee. It is this that needs to be changed.
For this to happen, the state government must get clarity onits own role vis-a-vis the bank. First, it must rid itself of the mind-set thatit is the owner of the Bank. It is not. Post 1998, when the bank was publiclylisted, the owner became the promoter. In addition to being a promoter,government is also the largest shareholder, at one time biggest borrower and acustomer of the J&K Bank. These multiple relationship are mutuallyexclusive but can at times be conflicting. There is need for the stategovernment to align all these roles strategically and operationally.
This network of relationships has to be synergised bybringing all these under the rubric of an enlightened stakeholder. What thismeans is that as a promoter, it should be responsible for the capital structureof 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 oninvestment outstrips its inflation adjusted cost of its market borrowings. As aborrower, it must ensure that its cost of borrowing from the bank is lower thanits bond yield. And as a depositor the efforts of the government should be toget a corporate bulk deposit rate. Nothing of this kind of benchmarking even exists. This will set therules for performance evaluation.
Instead, the state government behaves like a “feudal” owner,acts as a “family” promoter, and functions akin to a “benami” shareholder! Itis also an “un-informed “customer and “desperate” borrower.
Second, having defined its own role, the state governmentmust set out to build a Board that it recognises and respects. The Board, asthe apex corporate governance body of the Bank, has to be the supremeauthority; not the government not the chairman. It is an unstated principlethat in the Board the promoter director is the first among equals. That shouldgive government adequate comfort.
In fact the biggest sham, if not a scam, perpetrated by thegovernment is in the appointments to the Board. Even after being listed, thestate government has put relatives, affiliates and friends of the politicalclass on the Board.
Procedurally, even the independent directors are appointedwith the approval of the state government at the level of the Chief Minister.This is unacceptable and must change. Independent directors must be selectedthrough a formal process and both this process and their appointment should bea 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 forappointment of a non-executive chairman and a chief executive. The committeemust be given a set of laid out criteria for selection. Right now there isnone. It is equally important to fix the inter se hierarchy of the chairman andthe top management with that of the state bureaucracy. For instance, the SBIchairman is deemed as equivalent to that of deputy governor of the RBI.
Along with this what is also needed is an expert group toredefine and corporatise the relationship between state government and theBank. They key to crisis lies in institutionalisation of decision making andaccountability of performance as a norm rather than as an exception.
Tail piece:
The most dangerous aspect of the current episode is that forthe first time J&K Bank has been drawn into the vortex of “Jammu versusKashmir” and “Hindu versus Muslim”. This is not just sad but sickening. It istragic to talk in these terms, but necessary to do so if only to dispelmotivated rubbish. J&K Bank has, since 1938, seen 28 Chairmen; 14 fromJammu and 13 from the valley.
At present, the top management of the bank comprises twelvepeople; seven out of them are from Jammu; five from Kashmir and one fromLadakh! On the governance side, there is just one representative from thevalley; four are from Jammu and another four are professionals from rest of thecountry.
To counter the incendiary slander that J&K Bank hadbecome a Muslim bank, one has to stoop low and point out that only one boardmember is a Muslim! And of the 12 top management people, only four are Muslims.Pray, don’t fall prey to this propaganda.