PSU bank staff underpaid at top: RBI Governor Rajan

RBI Guv Rajan

PITCHING strongly for ending government role in top-level appointments at public sector banks, RBI Governor Raghuram Rajan has suggested empowering their boards to take all major governance decisions freely without having multiple "constituencies to satisfy".
The governor also called for levelling huge imbalances in pay scale of public sector bankers. He said 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 while addressing the annual bankers conference in Mumbai.
Suggesting a major reduction in government and regulatory oversight of public sector banks (PSBs), including by RBI itself, the outgoing governor on August 16 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.
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 Yojana) as also coordinating and developmental roles.
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 outgoing RBI governor’s comments assume significance in the wake of PSBs facing a huge burden of bad loans. There has been 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.
"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.
He also called upon the government and courts to allow lateral hiring in public sector banks. He said it is 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. He said lateral hires are also important, but many banks have strong aversion to lateral hires since they break the cadres.
Moreover, one of the difficulties public sector banks face in hiring the best talent is is the court judgments that prohibit hiring from specific campuses.
He 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 board’s 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.