Banks Need Training On Greed Management Not On Risk Management

Arun Jaitley & His Team Wrongly Clubs Corruption With Risk Management in Banks -By Rajesh Goyal

In a  report published in Times of India on 18th August, 2014 under the heading “New norms soon for PSU bank directors….”,  I read with interest the following statement “EDs would be expected to be experts on risk management and would have to have a track record on managing risks”.     The above news was part of the news relating to arrest of the Syndicate Bank CMD and views of the FM on the issue.   

 I have high regards for present FM, Arun Jaitley, for his capabilities of understanding most of the national issues,  as I have watched number of his speeches in Parliament live on Rajya Sabha TV.   There are only few who can match his capabilities.   However, Finance Ministry’s views on  linking the issue of  “corruption in banks (after the arrest of CMD)” to “risk management” in banks has perplexed me. I feel it is nothing but an immature statement or diversionary tactics or put the present lot of EDs / CMDs on backfoot.  

 

 I am sure number of eye-brows will be raised for calling FM as immature on this issue.   Let me explain, Corruption is moral / ethic based issue, whereas risk management relates to policies to minimizing your risks if a borrower defaults (due to various reasons) or market  crashes or failure on the operational front.

 

 Having worked in Risk Management Division of the largest PS Bank, I certainly believe risk management is an important area of banking specially after Basel II and III implementation.  However, the present problem of corruption and high level of NPAs, is not on account of missing  risk management systems, but on account of grossly missing ethical values  among the top bosses.   

 

 Some smart bankers holding top posts are trying to justify corruption on the plea that PS bank CMDs / EDs  are not paid market related salary and thus they are forced to indulge into corruption.  By this logic, a labourer working for repairs & paintings in your house is entitled to steal as he too may not be being paid even the minimum wages by the contractor.    However, the root cause of this corruption, is the exchange of black / corrupt money in majority of the postings of CMDs / EDs.  The general perception among bankers as well as public is that appointments of CMDs / EDs are ridden with corruption.

 

 Now most of the banks have in place a system called “risk ratings” of the corporate which is used in credit proposals.   Inspite of the fact that some banks have robust  risk rating system, their  NPA levels are very high.  Why?  The reason is not missing risk management policies but deep rooted  corruption in the banking sector, whereby even the honest lower functionaries are asked to tinker with various parameters of rating system to keep the account in higher rated category so that higher limits can be sanctioned or it can continue to be in standard category.   

 

The tools of transfer and charge sheet are used to create a terror in the office.  You can peep in your credit division or talk to a person associated with risk ratings in the field.   If he is frank with you, soon the honest rater will explain as to how AGM / DGM at Regional levels wants the rating to be perked up by tinkering few parameters.   All this is done as the same is desired either from Head Office officials OR the people in the field have already shared the booty.   In the process, the honest officers undergo very high stress as they are pulled and pushed for their resistance in not toying to the tune of dishonest creed.  There is a need for investigation in such areas.

 

 Therefore, Mr Jaitley’s linking of present day corruption with that of missing robust risk management system is totally misplaced.   Both these are two separate issues and should not be clubbed. 

  

One major glaring aspect in most of the banks is the system of putting up proposals which have no dissenting notes.   If an officer in Scale VI  does not agree with the proposal that has been moved from Scale I and passed through three or four layers,  Scale VI man will simply return the Proposal note without any comments and give verbal instructions for necessary changes in the Proposal itself, rather than putting his / her dissenting note.      Thus, the honest lower functionaries in most of the banks,  have no right to say NO to his boss, even matters relating to financial sanctions.   Credit Proposal for hundreds of crores  move on daily basis, without any dissenting note from Scale I to Board levels.


Our readers are aware that I keep on sharing through articles, some interesting events which I have faced during my service.  The prominence now being given to Risk Management has reminded me of an interesting episode that happened during my service.     I am narrating this event so as to remind Mr Jaitley and his team that to the  kind of people they have to deal with in the days to come.  Be ready for active resistance from many quarters.

 

It was in 2010, when I was posted after my promotion as AGM outside Delhi. Prior to my posting in that branch, I was associated with Risk Management Division for about 5 years.   There is no shame in admitting that I have limited exposure to credit as most of the time I was posted in other areas like branch routine, Foreign Exchange, Treasury Division and Risk Management Division etc.   In hindsight I feel it may be due to the fact that they knew it well that I will not be part of that ill-gotten money.

 

 

 

 During a routine visit by one ED of our Bank,  I was asked to attend a review  meeting, which was also to be also co-chaired by  Field General Manager, Circle Head.   While reviewing my slow growth in credit, ED asked me where was I posted earlier to my present posting and about my exposure in credit.   I told him that I have limited exposure in credit as I have been posted for long time in Risk Management and Treasury Division of the bank.   

 

 

 

  ED was shocked and in the open meeting retorted and asked “Who promoted you to the post of AGM ?  You mean you got promoted  as AGM with that little exposure in credit and mainly working in Risk Management and Treasury Divisions?”.   I felt  shocked to hear the ED’s  words,  but I could see the FGM and Circle Head nodding their head  with glee on their faces  as they too did not have exposure of risk management. 

 

 

 

 

 

 

I felt like asking  ED “How did he got promoted as Executive Director without having sufficient exposure in risk management and treasury?”  However, I controlled my emotions and somehow explained him the slow growth in business.   ED had every right to question about my business growth but he completely lacked the vision for importance of risk management team.                

 

 

 

 

 

 

 

 

 

 This episode firmed up my decision to take quit the bank job by taking VRS and start my own website to write as a free-lancer tp expose the ills prevalent in the banking industry,  rather than wait till my retirement which was 3 years away.  This was followed by another episode during my interview for promotion to Scale VI, for which I will write on some other occasion.   I left the bank within  few months of this episode.

 

 

 Today, after just 3+ years  from that episode (during these three years that  ED got promoted as CMD and has since retired), GoI is likely to issue guidelines whereby exposure in risk management will be a pre-requisite for promotion to the post of ED !!    I do not know how much loss he must have contributed  while serving ED and then as CMD of fairly large bank, purely due to his poor knowledge of risk management.   Although that ED, FGM, Circle Head  had strong knowledge about credit, yet I do not see any reflection of their strong credit background as NPA for both the banks are nowhere less than the industry level.  Had that ED  been younger, he might not have become eligible for promotion due to new guidelines. 

 

Today, I do not have regrets as now I am able to convey my feelings and messages to much large number of bankers on a single day, than what I could do it during my whole service period.   I have received lot of love and affection from my readers.

 

 The above is an indication of the level of understanding of majority of the CMDs and EDs that each area of banking has its importance - they only have regrds for the area in which they have specialised.     However, I am of the firm view that even if an officer has worked through out his service only in branches and as Hall Incharge, his contribution can not be ignored (if no major fraud has taken place during his tenure).   People working in routine play a major role in preventing frauds.   The FD scam that has taken place in Dena Bank and OBC could have been prevented by one  vigilant officer of even Scale I level.  No need to have knowledge of risk management.    Other areas of credit, FOREX, treasury, risk management are only equally important.   Now specialized fields like IT can not be considered as of little importance.   Two day breakdown of IT system can play a havoc with the reputation of a bank.

 

Therefore, I appeal to Finance Ministry to not wrongly mix up the issue of Risk Management and corruption.  It is possible that  general public may not understand the real issues, but Aam Banker fully understands this.   There is a need to eradicate corruption from all levels, if we want to save our Pubic Sector Banks.  We hope new government will concentrate on this issue.