Transforming Indian banking

To transform and build better governance, which of the two levers ought a leader use? Compliance? Or culture?

Founding Fuel

The next 10 years of banking will be completely and radically different from the last 50. How do we prepare for it through the lens of governance, leadership and culture?

That was broadly the theme of this discussion at the digital launch of the book, Transformational Leadership in Banking: Challenges of Governance, Leadership and HR in a Digital and Disruptive World, edited by Dr Anil Khandelwal, former chairman of Bank of Baroda, based on contributions from 34 stalwarts.

Founding Fuel, as the knowledge partner, teamed up with leading book publisher Sage to curate this special conversation moderated by Indrajit Gupta, co-founder, Founding Fuel.

The panel included:

  • Shyamala Gopinath, former chairperson of HDFC Bank and former deputy governor, RBI
  • Ravi Venkatesan, former chairman of Bank of Baroda
  • Rajnish Kumar, former chairman, State Bank of India
  • MS Sriram, chairperson, Centre for Public Policy, IIM Bangalore

Edited transcript

(Edited for brevity and clarity)

Dr Khandelwal: I wanted to reposition some of the soft factors, which I myself experienced are the lifeblood of transformational journeys of organizations. What are the barriers that I have experienced in transformation? I realized that these intangibles are government governance, and leadership culture.

In my own journey in Bank of Baroda, I realized that spending time in resurrecting some of these areas paid rich dividends. Focus on intangibles contributed 50-75% to market capitalization.

Some of these dimensions of change and transformation, which in our hurry to look at operational issues, somewhere get missed.

Peter Drucker said that the bottleneck is always at the neck of the bottle. So, the book is written for the top management. For the boards, the CEOs, senior management, and anybody who is interested in the art and science of transforming organizations.

The tipping point for me was when I saw the market capitalization of a private bank was twice the market capitalization of combined public sector [banks]. Having worked in public sector, I thought we have the best of people, who are passionate. So what is it a missing link?

I looked at it from different lenses

Culture is equal to governance, plus leadership, plus talent

1. Governance—external and internal: In external governance, the rules were set 50 years back under the Bank Nationalization Act. That the board of directors will come from different categories, and that the board cannot appoint a CEO or other board members, decide on the remuneration, or tenure. So the CEOs and directors are virtually birds of passage. How can you manage large size organization?

On internal governance, there's the overwhelming nature of bureaucracy and hierarchies. 

2. Leadership: What kind of leadership do we require for a digitized world? To compete with many new actors in banking?

3. Talent and human resources: Where are we leading to with rigidities in HR policies? In the recruitment, in the promotions? There are several guidelines from the government and there’s the undifferentiated wage structure.

4. The 'architecture of fear': How can you look at business decision with the lenses of criminality? 

5. Culture: For me culture is equal to governance plus leadership, plus talent. And of course, in the architecture of conduct, and ethics. How do we create that?

Shyamala Gopinath: Transformational leadership is not just about leaders possessing specific traits. They need to work along with the team members to identify, change and develop the next action steps. It is, therefore about building a culture of collaboration and teamwork.

Transformational leadership is about building a culture of collaboration

It is very important to incorporate progressive HR principles into board matters, because the board has to treat HR as a business.

Rajnish Kumar: When the pace of change is so fast, can leadership continue to lead the way they have been used to in traditional organizations?

I found that despite everything, it is possible to get the desired results for State Bank of India. Its digital leadership was established despite being in the public sector. My limited point is, you can't afford to be reactive in this scenario—that somebody has done something and then you will follow.

Technology for the sake of technology has no meaning. The question we asked is what is in it for the customer and the Employee? Will there be a buy in from the employees?

You can't afford to be reactive in this scenario

The leadership has to be proactive and not reactive. But the fundamentals of course—governance,  simplicity, communication, courage of conviction, leaders’ credibility—will remain unchanged.

Ravi Venkatesan: When I came to Bank of Baroda...[like most public sector banks] we found ourselves in a perfect storm, with high NPAs, eroding competitiveness with market share, profitability, everything declining, and utterly unprepared for the digital tsunami. These became the three vectors of our transformation. Our balance sheet was the strongest of any of the public sector banks by 2018, our provision coverage ratio was higher than even SBI. Our credit growth had come back full swing. The profitability at net interest margin doubled, return on equity was double digits. We completely modernized the technology infrastructure of the bank.

So, to the question, is transformation possible? Absolutely it is. And it's fundamentally, as Dr. Khandelwal has written, about people and technology and governance.

Is good governance possible in the context of government ownership and control?

But to me the interesting question is this: what happened since?

In September 2018, the government forced a merger of Bank of Baroda with Vijaya Bank and Dena Bank. And in that period, from 2018 to today, the market capitalization of BOB has come down by two-thirds. At the same time, when you see private sector banks, like Kotak, the market cap has tripled. ICICI has doubled. And so, it really raises the fundamental question of whether good governance is possible in the context of government ownership and control. And in my contribution to the book, I argue that it is not, it is inconsistent.

MS Sriram: I've still not figured out what the government is trying to achieve with privatization. The 1991 moment in banking came in 1993. And it never went beyond that.

If you look at the Narasimham Committee report, both financial sector reforms and banking reforms, they're so prescient and laid out the entire playbook for how the banking sector should move ahead. We constantly get a sense that we always get the sequence wrong. And therefore, we destroy the value of the asset that we possibly have, which could both create much more value to the customer, as well as a value to the government.

Whatever the RBI insists on private sector banks is exactly what is not there in the public sector banks

The sequence that should have been ideally there: repeal the Bank Nationalization Act, get them into the Companies Act, make them accountable on par with private sector banks, and then slowly move with, possibly, divestment and change of leadership and so on. The problem with the public sector banks is that whatever the Reserve Bank of India insists on private sector banks is exactly what is not there in the public sector banks—diversified ownership, not more than 10% voting chair, etc.

The way the state deals with SBI is completely different from the way it deals with the rest of the public sector banks. You could see that SBI was able to take on competition, continue to maintain its dominant position and continue to be cutting edge. Because the leadership in SBI comes from within, and there's a great sense of ownership of the brand.

Ravi Venkatesan: Two things are fundamentally unhelpful to these institutions being competitive and flourishing. One is, the governance model is broken. You're applying the same bureaucratic model, which you use for governing the country, on to these institutions. It's not conducive at all for governing a modern bank in a fast-changing world. Dr Khandelwal talked about the fact that the board is emasculated in terms of its decision rights, it does not have people with the expertise and perspectives that you need, half the positions on the board are vacant. So you can't even effectively discharge your fiduciary duties. This rotating system of executive directors and CEOs really does contribute to lack of continuity of direction. If that doesn't change, you will not be able to change the destinies of these institutions.

Today, banking is all about deep expertise in a number of areas and you're unable to do this

The second is the rules that govern talent. We do recruit really good people. They’re incredibly hard working, there's a lot of institutional loyalty. But the rules of the game prevent you from doing two things—holding people accountable, and specialization from growing expertise. Today, banking is all about deep expertise and specialization in a number of areas and you're unable to do this.

On all top of all this, like Dr Khandelwal said, is the architecture of fear. All these vigilance and investigation agencies, does not do one thing to deter the bad people.

It is theoretically possible to create a great institution in this system of rules, yes. But it's pretty unlikely. I hope the government this time in its wisdom doesn't prioritize the smallest banks that don't make any difference, but rather shows some boldness in taking a PNB or a BOB and unleashing them.

Shyamala Gopinath: There's very little level playing field between public sector and private sector banks. There's very little flexibility, autonomy, in so many areas. And again, this fear factor that doesn't allow them to do a lot of things quickly.

But one ray of hope is that with more digitization, AI, ML, platform-based operations, data analytics for decision making, for risk management—hopefully our public sector bank officials will also be able to take quicker decisions, at least on the retail, consumer finance side, as well as maybe even SME side.

I entirely agree the talent in these banks is so good, they're professional, they understand everything of banking. We're just not leveraging the expertise.

Because of the various hassles that the management faces in taking independent decisions and the processes that they've set, even if you find a very good technology tomorrow, and you want to take it, you just can't. For instance, HDFC Bank realised a couple of years ago that the competitors going forward will not be the banks, but will be these big tech giants like Amazon and Google Pay and you work towards that. There's absolutely no problem in doing that. Which is not going to be the case in public sector banks. 

Indrajit Gupta: Regulators around the world are now starting to shift the focus from compliance to culture as the lever to really change governance.

Shyamala Gopinath: If the regulators can ensure that the culture of a bank is something acceptable, then don't we need regulation? I think that's not really the case.

It's a privilege to have a banking license and for that privilege, one needs to regulate these banks.

Bank regulation is required for a totally different purpose. Banks are highly leveraged, accept uncollateralized deposits...the kind of externalities that one faces when anything happens to a bank, when there's even a slight lack of trust or confidence. These institutions have access to Central Bank liquidity. It's a privilege to have a banking license and for that privilege, one needs to regulate these banks.

The regulations of late are evolving and are subject to reviews.

And then of course, governance to the extent that our governance seems to be deficient. These governance deficiencies were seen in the developments that happened in the private sector banking sector in India.

So, there will always be continuous review of these rules.

But yes, I can definitely agree that culture is an extremely important part. In fact, post the global financial crisis, there has been real concern about this culture in financial services all over the world.

Regulators are also looking at culture, like you mentioned, more in how that manifests itself in the form of bad behaviour, in conduct. And, in fact, now, they do rate that.

Ravi Venkatesan: If you have a very hierarchical culture, or fear is a big part of the culture, and then you want bankers to be entrepreneurial and risk taking, it's not going to happen.

So the question is, how do you reshape culture? It’s hard. It’s like changing your gut biome.

Indrajit Gupta [to Rajnish Kumar]: Your ability to create a leadership pipeline at SBI is exceptional compared to any other public sector bank. What is the secret sauce?

Rajnish Kumar: At SBI, mostly it has been the insiders. So, even if there is discontinuity in terms of short tenure for CEOs or managing director, still it ensures some continuity because in one capacity or the other, they are part of the decision making process. In other banks, it has been a game of musical chairs.

It takes time to understand the people, to understand the organizational structure and DNA. By the time you understand, it is time to move. So at least in SBI, we have not faced that situation

SBI has certain advantage: From the very beginning it has had the mantle of being the leader in the industry. Second, it had a well-defined system of recruiting from the market.

About grooming [potential leaders] it is formal as well as informal system. Leaders are identified early.

There is accountability for taking decisions but there is no accountability for not taking decisions

The ability to think through, the ability to be ahead of the curve most of the times—that is built in the organization DNA. and the processes of course, are well laid in the organization. A bank like SBI or PNB—you can't govern these banks without processes. But the most unfortunate part in the public sector is that there is accountability for taking decisions but there is no accountability for not taking decisions.

Indrajit Gupta: Bad news, however, is that your market cap, as Dr Khandelwal was saying, is not even half of that of your nearest private sector bank. What do you attribute it to?

Rajnish Kumar: One is definitely the focus on the returns to shareholders. My majority shareholder is least bothered about what my market cap is. Second is the obligation to the other sections of the society. I have always maintained that if there was a calculation to show the return to all the stakeholders in society, the public sector banks [will come ahead]. The third is that market cap is a function of the belief among investors that the organization they are investing in, will be able to give consistent growth and earnings. In case of public sector banks, most of the time, that consistency in earnings and growth has been missed, and there's a huge discount, whether it is warranted or unwarranted, of the government ownership. The ownership discount is huge. Today, if government announces that they are going to bring down their shareholding in SBI to 49%, the market cap will exceed HDFC’s.

Indrajit Gupta: Taking a leaf out of Jack Ma, when he said that people need banking but not banks. That's perhaps quite true when you think about the future of banking.

Shyamala Gopinath: After the global financial crisis, nobody could allow the banks to collapse. Banking did continue. It's true that you have a whole lot of other entities that can provide more efficient, better services to a larger number. But ultimately, when it comes to money and intermediation, the whole issue is about returning money to whoever has placed money, whether an investor or a depositor.

FinTechs are still dependent on a bank, because every single transaction has to end up in a bank.

What I'll say is, it's true to a great extent, particularly in some of the areas which are not real banking, like for instance, the payment side, which is where you have all these FinTechs—they could probably do much more, much better, but they're still dependent on a bank, because every single transaction has to end up in a bank. 

Ravi Venkatesan: I think people are consistently under estimating the ability of banks to adapt and transform themselves.

The fundamental issue is one of trust, and it's becoming a bigger and more central issue. I do think that banks are going to be around for a much longer than most people might suspect. They do have to transform but as Rajnish said, even SBI, whatever constraints, it has managed to stay quite with the game and technology, and even Bank of Baroda.

Today, technology is not the issue. It's question of leadership and things like that.

Every tech company also needs a bank as a partner

The second thing is about partnerships. It's not like the banks are going to have to do everything on their own. Every tech company also needs a bank as a partner. The number of people who come to India—the first port of call is an SBI, or an HDFC, ICICI. So it's not like the bank is going to have to invent FinTech for itself. You partner with all these kinds of institutions, you partner with startups, you partner with payment banks and services.

It's going to be an interesting mosaic.

MS Sriram: Banks will exist, because bank is about trust. We all have wallets, and how much money do we park in the wallet? We always top up the wallet from a bank account.

Indrajit Gupta: What you would advise  that leaders think about as they prepare themselves for the digitization challenge?

MS Sriram: One, imagine a world with no currency. And that will give you some idea of what could be a strategy.

Second, think of micro retail, because that's an activity that is going to open up. Because if you're imagining a world without currency, then you can really do very, very small ticket transactions.

Third, think about your customer safety, because this is going to open up a significant amount of vulnerabilities for the customer. And as a banker, if you don't worry about customer safety, you will be dead because you'll lose the trust.

Rajnish Kumar: The pace of the change today is 30, 50, 100 times more than what it used to be. So, in such a scenario, you have to act very fast. The banks would remain, but would they remain in the current shape? I think banking will emerge more as a platform where you provide the service and the front end could be managed by anybody.

At SBI, I always had this vision that it should become banking as a service platform through what it has created and allow many smaller entities to do the front end marketing.

The major change which is going to happen, that the digital distribution channels will become more and more predominant. And the branches would be therefore providing the trust, visibility, after sales service, hand holding.

Shyamala Gopinath: When Aditya Puri was awarded the Lifetime Achievement Award in 2016 by Financial Express, Anand Mahindra quoted an instance when he was much younger: There's a wonderful story about the time when an eager young manager launched into a presentation to Aditya Puri, replete with management jargon, and Aditya apparently looked at him and said, "Teri unchi English mereko samajh mein nahin ata hai. Sidha baat kar. Mereko yeh bata ke laddoo kidher hai?" (I don't understand your high English. Talk straight. Tell me where's the laddoo?)

This is where every leader should look at sustainable business. Particularly in banking, resilient, sustainable business is the value system.

Leaders should also be mentors. And total customer centricity is a must.

Ravi Venkatesan: The advice I would give government is, this is the time for being transformational. And the transformational act I would look for is repeal the Bank Nationalization Act.

The advice I would give leaders, whether they're in private sector, public sector, government, society is be intentional about your legacy, work towards building something, leaving behind something that you can be proud of, and others can point to and be inspired.

Dr Khandelwal: We must understand the writing on the wall. Digitization is both an opportunity as well as biggest threat. When new partners, new actors come, banking cannot remain with bankers, because anybody who has customers can do banking.

Transformation is not a choice now. Transformation will create fundamental shifts and therefore the leaders of today and tomorrow have to have a transformative vision. That vision needs to be de-jargonised from corporate boardrooms to a middle management.

I always believe that working at the self level is very important. Reverse mentoring, learning from your juniors, learning from above.

Transformation is not a push button thing. Most of the time it starts with leaders, it ends with leaders, and therefore I said, transformation has to become the new nervous system of the banks.

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