Research by Prof. K. Subramanian

Research by Prof. K. Subramanian under Grant from Alumni Endowment Fund
 
Innovation and Entrepreneurship, activities critical for job creation and economic growth of the country, are propelled by ‘Alternate Investment’ that comprises of ‘Private Equity (PE)’ and ‘Venture Capital (VC)’.  While VC leads to innovation, PE eases the financial constraints being faced by firms. As per Prof. K. Subramanian, this fact is well recognized by policy makers and academic researchers alike.
 
To give due importance to alternate investment, the Alternative Investments Policy Advisory Committee has been set up under chairmanship of Mr. Narayan Murthy. It is a high power committee that makes recommendations directly to the finance minister and to the Chairman of Securities and Exchange Board of India (SEBI) on regulatory changes in alternative investments. As a member of this Committee, Prof. Subramanian has been working in two key areas. Under policy making, he is benchmarking the information sharing on how the venture capital investments perform. As part of academic research, he has been working on two projects involving Public Sector Banks (PSBs):

 

  • What are the effects of turnover of Chief Executive Officers (CEOs) in PSBs?
  • What is the impact of periodic transfer of employees on loan defaults?

 
Effect of CEO Turnover in PSBs
In State Bank of India, when Pradeep Chaudhary took over from OP Bhatt as Chairman, he accepted a reduction on earning by almost 99%. What he primarily did was to increase provisioning significantly.  Prof. Subramanian, in his research found that this practice was not a one-off phenomenon but was widely applied across PSBs. He uncovered that provisioning in this manner reduces earnings in one go and enables the CEO to commence tenure at a lower base. Since the tenure of CEO is short, he/she is able to show high performance over the tenure by having this back up. In private sector banks, with tenures being typically 6-7 years, creating backups do not matter and such practices are rare.
 
Impact of Periodic Transfers of Employees on Loan Defaults
As per policy, Probationary officers (POs) in PSBs are rotated every three years to avoid collusion between bank staff and clients. The practice has resulted in a few unintended consequences. Prof. Subramanian analyzed data of agricultural loans of one year duration disbursed by PSBs. He found that loans disbursed by POs in their first and second year of tenure had good recovery as against loans disbursed in their final year; which had almost 30% higher default rate!  This was due to good diligence and thorough screening of borrower in loans disbursed when responsibility remains with PO. For loans disbursed in third year, the responsibility for recovery would pass on to the next incumbent and hence the laxity. A typical case of ‘passing the buck’!
Another drawback of this transfer policy has been that the new PO treats clients who were disbursed loans by previous incumbent as ‘favored clients’ and makes disbursement of repeat loans that much more difficult.
 
Prof. Subramanian has utilized the grant from Alumni Endowment Fund to do tangible academic research. The findings have been submitted to relevant authorities. It is hoped the outcomes will sensitize management to make PSBs more efficient in their dealings.

About the Professor :


Krishnamurthy Subramanian is one of the world’s leading experts in banking and economic policy. His service on the expert committee on governance of banks for The Reserve Bank of India has established him as one of the chief architects of banking reform in India. He is a member of SEBI’s Standing Committee on Alternative Investment Policy headed by Narayana Murthy. His public policy work also extends to other sectors, including working with the Ministry of Finance to reform food policy in India. As part of his corporate policy work, he serves on the boards of Bandhan Bank, the first bank to be licensed after independence in eastern India.

He also serves on the board of the National Institute of Bank Management, which is chaired by the RBI Governor. Currently Subramanian serves as Associate Professor of Finance (with tenure) at the Indian School of Business, the top business school in India and the only Indian institution to be ranked in the world’s top 100 for path breaking research.