PSU Bank Boards Outperform Private Bank Counterparts

Governance Standards in Banking: PSU Banks vs Private Banks

A heated debate is currently underway in the financial sector, with regulators and industry experts questioning whether private banks or public sector (PSU) banks have better governance standards. What was once considered a joke a decade ago has now become a serious conversation, with many pointing to the seemingly better functioning of PSU banks despite several of them not having a chairman in place for many years.

In contrast, private banks continue to grapple with governance issues, with numerous scandals and controversies surfacing in the last year alone. This raises questions about the effectiveness of governance in private banks compared to their PSU peers.

Accountability in PSU Banks

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One key factor that may contribute to the better governance in PSU banks is the fear of accountability that has increased over the last five to six years. In PSU banks, the top brass is aware that their tenure is fixed, and they will be held accountable for their actions after they leave office. This creates a sense of discipline and responsibility among executives.

Reality in Private Banks

In stark contrast, private banks have a more relaxed approach to accountability. An executive director can hold onto their board seat for up to 15 years, regardless of their performance. Similarly, a CEO's tenure is assumed to last for 15 years, with the RBI unlikely to intervene. This creates a culture of complacency and undermines the authority of independent directors, who are supposed to ensure the maker-checker concept is in place.

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Culture of Backdating in Private Banks

A culture of backdating resolutions and minutes is emerging in private banks, with some former bankers revealing that this practice is becoming more prevalent. While it's not unique to private banks, the frequency and confidence with which it's done raises serious questions about governance in these institutions.

In conclusion, while PSU banks may not have the perfect governance record, they seem to have a better approach to accountability and discipline. Private banks, on the other hand, need to catch up and adopt more robust governance practices to maintain the trust of their stakeholders.