We, as a nation, seem to have a rare gift for lurching from a crisis of one description to a crisis of another description. At the time of the Trump visit it was riots in the Capital, now it is the Yes Bank going bust. Such instances of governance failures make one wonder about the quality of human capital in our country, particularly the capability of people in top management – both in the Government and the private sector. India is a meritocracy. Only one student in a thousand who appear at the JEE qualifies to study in an IIT.
NEET has a similar strike rate. The best of the lot who go to the IITs also qualify for the IIMs and become managers. Government service requires even higher capability; more than 3 crore applications were received for 90,000 Class 3 railway jobs. An advertisement for recruitment of 1,137 constables in Mumbai Police has got more than 2 lakh responses, which comes to around 175 candidates for each post. Applicants included 3 doctors, 5 lawyers, 167 MBAs, 423 engineers and a large number of post-graduates.
So, what is it that makes the crème-de-la-crème of our youth fail in real life crises? Probably, they imbibe wrong management lessons from our political and bureaucratic leaders. The tendency to remain in perpetual inertia is one such quality. Thus, the Indira Gandhi Canal is a work in progress for the last seventy years and large defence acquisitions typically take more than two decades.
Overall, as on date, we have 552 delayed projects of Rs.150 crores or more, of which 187 projects have overall delay in the range of 1 to 12 months, 121 projects 13 to 24 months, 132 projects reflect delay in the range of 25 to 60 months and 112 show delay of 61 months and above. Judicial delays are such that the case relating to the Babri riots in 1992 is still being heard by the trial court; more than one crore cases are pending in different judicial forums for more than 3 years.
In this scenario, young managers soon learn to do nothing, hoping that problems would resolve by themselves. One has only to see videos of Delhi riots to notice the masterly inaction of the police; policemen are patrolling the streets, unconcerned, while miscreants go about their work. Even when rioters confront the police or attack their colleagues, the response of the police is muted. Keeping the top bosses happy, at the cost of ignoring core interests of the organisation is another common failing.
The meteoric rise of personal assistants and stenographers to positions of power, particularly during Congress days, would prove this proposition. The meritorious suffer in this process and unsuitable people often come to manage important organisations. Needless to say, when it comes to the crunch, top people are often found wanting. Then, there is the lure of corruption to which all Indians succumb rather readily. Our Prime Minister advises Indian youth to become entrepreneurs but our youth have no stomach for the hard labour and struggle involved in entrepreneurship, they prefer a Government job which is often not wellpaying but gives them a sense of power and a capacity to earn on the sly.
Many private sector employees mimic the behaviour of their Government counterparts, by being arrogant and corrupt. Professionals in the banking sector have these very same failings. During Demonetisation, credible allegations of corruption flew thick and fast against bank employees, yet, after sometime all was forgotten. Put rather bluntly, Yes Bank failed because the erstwhile management of Yes Bank had lent large sums to failing businesses in lieu of private commissions.
Sadly, this practice, which is the root cause of almost all bank failures, is not uncommon. Co-operative banks are the worst culprits in this respect, and their failure rate is also the highest. Bank frauds have become increasingly common; Vijay Mallya, Neerav Modi and Mehul Choksi have brought infamy to the banking sector by the enormity of their loot. The defalcated moneys have not been recovered despite the involvement of myriad enforcement agencies, raising doubts on the obsessive security under which banks operate.
The ladies heading ICICI and Axis Bank, who at one time were icons for Indian women, had to leave their jobs under a cloud and one of them is under investigation for doubtful dealings with a borrower. Such instances shattered the myth that ladies and private banks were above-board in their financial conduct and it was only the Public Sector Banks which needed to be controlled. Rather, repeated instances of massive bank frauds and bank failures have put a question mark over the capability of the Reserve Bank to oversee the working of banks. Non-Banking Financial Companies have fared even worse, with the biggest ones, IL & FS and DHFL, keeling over and bringing down common investors and entities that had lent money to them.
Significantly, IL & FS had a number of retired bureaucrats on its Board who promptly jumped ship when things began to unravel. Financial analysts have pinned the blame on ‘systemic failure’, whatever that may mean, but few have mentioned the underlying cause – unprincipled greed of the top management. As a solution to the problem of failing banks, the Government has proposed to merge a number of sick banks with healthy ones. A mega merger of Public Sector Banks was undertaken in August 2019, after which, the number of Public Sector Banks stood reduced to 12 from the earlier 27.
From 1st April 2020, another 10 Public Sector Banks are proposed to be amalgamated to form four ‘super banks.’ However, the merger of sick banks with healthy ones may not be much of a solution – beyond improving the current balance sheets of the sick banks which would now reflect the assets of the healthy banks. The Government appears to be unaware of a greater danger – the unhealthy work culture and management practices of the failed banks would infect the merged ‘super banks’ – rendering them sick from their very inception. The new banks would also be burdened with unmanageable redundancy because there would be no retrenchment of surplus staff. In this context, the merger of Air India and Indian Airlines readily comes to mind.
For similar reasons, the merged airline (Air India) started incurring huge losses after merger. Things went so bad that Air India is now up for sale – with no interested buyer in sight. A far simpler solution can be tried. Proceeding on the premise that there is no inherent advantage in having a large number of very large banks, why can’t we have smaller banks that can be managed on commercial principles by their own directors?
The directors of such banks should be finance professionals, not random well-connected individuals, who would be well paid for their labours. Smaller banks would not be able to hide their misdeeds in the plethora of figures, in the manner the bigger banks do. Such small banks would not be ‘too big to fail.’ Further, in case of bank failures, instead of trying to revive banks by putting in capital from PSUs like SBI or LIC, the Government should pay back depositors and send the bankrupt banks to NCLT.
Depositors, who are innocent sufferers, should not lose their hard-earned money. This step would shore up the confidence of the public in our banking system. In this scenario, the Finance Ministry would be divested of their control over banks, which would put an end to allegations of cronyism. In any case, banks need to be run professionally and the objectives of the Finance Ministry may not coincide with the objectives of a prudent bank. For example, when the RBI reduces the Repo Rate, the Ministry wants banks to offer more credit at cheaper rates, disregarding the fact that the quantum and rate at which credit is offered would depend on the perceived risk of the loan going bad, which is high, when the economy is not doing well.
After the meltdown of 2008, the US Federal Reserve had to infuse $2.2 trillion to rescue the American banking system, leaving taxpayers fuming. Nobel Laureate Joseph E. Stiglitz observed: “We have banks that are not only too big to fail, but too big to be held accountable.” Let us ensure that our banking system does not reach that stage.
(The writer is a retired Principal Chief Commissioner of Income-Tax)