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Overpaid at bottom, underpaid at top: Raghuram Rajan underlines the problem at PSBs

Pitching for an end to the government’s role in top-level appointments at state-run banks, RBI governor Raghuram Rajan on Tuesday suggested empowering their boards to take all major governance decisions freely without having multiple "constituencies
India TV Business Desk New Delhi August 16, 2016 18:40 IST
India TV Business Desk

Pitching for an end to the government’s role in top-level appointments at state-run banks, RBI governor Raghuram Rajan on Tuesday suggested empowering their boards to take all major governance decisions freely without having multiple "constituencies to satisfy".

Suggesting a major reduction in government and regulatory oversight of public sector banks (PSBs), including by RBI itself, the outgoing governor also proposed withdrawing the central bank nominees from their boards.

"Today, a variety of authorities — Parliament, the Department of Financial Services, the Bank Board Bureau, the board of the bank, the vigilance authorities, and of course various regulators and supervisors including the RBI — monitor the performance of the public sector banks.

"With so many overlapping constituencies to satisfy, it is a wonder that bank management has time to devote to the management of the bank," he said.

The Governor also called for levelling huge imbalances in pay scale of public sector bankers saying that their top management should be paid higher instead of the present state of overpaying the bottom and underpaying the top which makes it difficult for them to attract talent at the higher level, specially through lateral hiring.

"One of the problems, of course, is that as with all public sector entities, you overpay at the bottom, and underpay at the top. Compensatory, the difference is that, yes, you feel that you are doing the job for the broader public but you just make it harder to attract top talent, specially a lateral entry," Rajan said.

Rajan also stressed on the need to streamline and reduce the overlaps between the jurisdictions of the authorities, while specifying "clear triggers or situations" where one authority's oversight is invoked.

He said agencies like, CAG and CVC, should get involved only in extraordinary situations where there is evidence of malfeasance, and not when legitimate business judgment+ has gone wrong.

Rajan, who has often been seen during his three-year tenure as central bank governor ending next month, as being on the opposite side of debate vis-a-vis the government on various issues, said these suggestions should be viewed as opening a discussion rather than formal views of RBI.

For the Finance Ministry's Department of Financial Services, the nodal department for banking sector, Rajan favoured programme-specific roles (such as for Jan Dhan scheme) as also coordinating and developmental roles.

On RBI, he said, it would perform a purely regulatory role and withdraw its representatives on bank boards, while adding this will require legislative change.

"Over time, RBI should also empower boards more, for instance, offering broad guidelines on compensation to boards but not requiring every top compensation package be approved," he said.

In the interim, till the bank boards are professionalised, he favoured the mandate for this to be vested with the fledgling Bank Board Bureau (BBB) so that it can help improve the governance and management structures at the public sector banks by allowing it to fully handle the appointments.

The comments assume significance in the wake of PSBs facing a huge burden of bad loans and amid calls from several quarters for professionalising their boards.

"Though the most pressing task for public sector banks is to clean up their balance sheets, a process which is well underway, a parallel task is to improve their governance and management," Rajan said here at a banking conference and called for allowing the BBB to handle entire process of top management appointment.

"Over time, as the bank boards are professionalised, executive appointment decisions should devolve from the BBB to the boards themselves, while the BBB, as it transforms into the Bank Investment Company (BIC), which is the custodian for the government's stake in banks, should focus only on appointing directors to represent the government stake on the bank boards," the governor said.

Addressing bankers at the annual Fibac, he went on to add that "it is important that bank boards be freed to determine their strategies. Too much coaching by central authorities will lead to a sameness in public sector banks."

He also called upon the government and courts to allow lateral hiring in public sector banks, saying "equally important is to fill out the ranks of middle management that have been thinned out by retirements, and to recruit talent with expertise in project evaluation, risk management, and IT, including cyber security.

The central bank chief said lateral hires are also important, but many banks as well as public institutions have strong aversion to lateral hires because they break the cadres, and noted that one of the difficulties public sector banks have is the court judgements that prohibit hiring from specific campuses.

It is an anomaly that the National Institute of Bank Management is supported by public sector banks' funds but sends most of its high quality graduates to work for private sector banks, he said and pointed out that "public sector banks can petition the courts to allow some modicum of campus hire, especially when the campus chooses openly through a national exam."

The governor further said there is a need to be more liberal in allowing local hires. There are many places in the country where people may find it difficult to go, but local talent is available and can do a fantastic job.

"To have local information, be comfortable with local culture, be locally accepted, and be competitive in low-cost rural areas. Public sector banks will have to have more freedom to hire locally, and pay wages commensurate with the local labour market," he said.

Noting that despite BBB has been mandated to handle the top hiring at state-run banks, the government still plays a role in managing this, and the final decision on appointments is still being taken by the Appointments Committee of the Cabinet, and appointments of non-official directors onto bank boards still lie outside the BBB.

"As the BBB gains experience, it would make sense to allow these decisions also to be taken by it," Rajan said.

He also called for ending the differentiated treatment that public sector banks enjoy from both the government and the regulator. "Authorities like the central bank and the government should, over the medium term, reduce the differences in regulatory treatment between public sector banks and private sector banks, and more generally, between banks and other financial institutions.

"Some of the differences between public sector banks and private banks can be mitigated if the government pays an adequate price for mandates," he said and cited the DBTL as a tool to level this, saying all banks have an incentive to undertake this business and the most efficient bank will garner more business.

Similar method could be adopted at agri lending too, he said as banks are finding ways to make MSME loans more remunerative by decreasing transaction costs and similar techniques could be brought to agricultural loans, specially as farm productivity increases.

"Wider use of credit information bureaus and collateral registries should also help improve credit evaluation and lower the cost of repossession. This should make it easier to meet priority sector norms.

"The cost has been further reduced through the introduction of tradeable priority sector lending certificates, whereby the most efficient lenders can sell their over-performance, while the inefficient ones can compensate for under-performance by buying certificates," he said, adding over time, these differences should also be reduced further.

(With PTI inputs)