Poor governance, constant interference of promoters, opposition from unions and talks of being an acquisition target seen as main deterrents.
Private sector banks, particularly the old generation ones, have a habit of choosing their chiefs and senior management executives from among bankers who have previously worked with foreign lenders.
These bankers are expected to bring in new ideas, use their expertise in scaling up operations and ensure profitable growth across businesses.
But not many have been successful; a few even quit before their term ended.
There are several problems: Poor governance standards, constant interference of promoter families in day-to-day functioning, opposition from employee unions and never-ending talks of being an acquisition target. Then, there are legacy issues and resistance to new ideas, systems and processes.
Bankers are not willing to speak openly on this issue, but on the condition of anonymity they agree it is difficult to turn around some of these banks that have been struggling for years with low profits, mounting bad loans, and inadequate capital.
One chief executive, who resigned before the end of his term, admitted he was finding it difficult to operate in an environment where promoters were not always supportive.
Surprisingly, the same promoters had earlier promised this banker a free run and convinced him to quit his job with a large foreign bank.
The regulatory glare on some of the business dealings between the bank and group companies of an Indian business tycoon also made him uncomfortable. Finally, a little over two years after taking charge, he decided to quit.
“If promoters trust the CEO (chief executive officer), respect his independence and empower him, things work out well. There are evidences of such happy examples,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, and senior expert advisor for global financial services, EY.
Employee unions also pose challenges. In 2011, senior executives of Dhanlaxmi Bank faced stiff opposition from a section of its employee union that accused the top management of window-dressing the accounts and showing inflated profits.
While the management dismissed the allegations, its Chief Executive, Amitabh Chaturvedi, left the bank a few months later.
The appointment of Chaturvedi, who had previously worked with ICICI Bank and Reliance Capital, was among the high-profile ones at old-generation private banks.
It is believed his serious disagreement with other board members over functioning of the bank led to his exit.
The difference in pay packages of old and new employees also creates a rift. New CEOs often bring along their own teams in senior management positions; this creates anxiety and insecurity among existing staff, analysts say.
Many wonder why some of these bankers leave their fancy jobs, take pay cuts and join struggling old-generation private banks.
“Sometimes, it is a question of what you can do in life next. The old-generation banks offer an opportunity to build an institution almost from scratch. It has its own appeal,” the chief executive of a small private bank said. He had joined this lender after spending nearly a decade as the country head of a foreign bank in India.
But they have their tasks cut out. Poor governance standards and past problems often prompt the regulator to impose certain restrictions (as in the case of a Mumbai-based small private bank), severely denting the lender’s growth aspirations.
The new chief then has to revise his strategy and focus on consolidation, instead of growing businesses at break-neck speed.
This does not always augur well for promoters, employees and investors, who were hoping the new management would turn the bank around fairly quickly.
A committee to review governance of boards of banks in India, under P J Nayak, had observed in its report to the Reserve Bank of India (RBI) in May that CEOs of many old-generation private banks were disempowered.
“RBI should attempt to diversify boards at (old private-sector) banks where independence is not visible, by mandating prior RBI approval for directors in such banks.”
Bankers said the constant talk of being an acquisition target was also a worry.
Speculations of some of the old-generation private banks being taken over are always doing the rounds. It affects employee morale and leads to lower productivity.
While a few CEOs have been successful in turning around the performance of their banks, many still continue to struggle.