Rajan said the thinning of middle management ranks in public sector banks can be viewed as an opportunity to draw in more younger people and promote them faster by giving them significantly more support in terms of training, “Yes, we cannot give them 25 years seasoning as we did in the past, but may be we can give them training”.
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The governor has asked banks to bring in new owners or new managers which can be either public sector firms or private sector agents.
Rajan added that banks’ boards needed to be empowered to provide proper oversight of banks, suggesting the RBI should withdraw its representative from boards at state-owned lenders and provide a “pure regulatory role”, an action that would require a change to current legislation.
He, however, was quick to admit that now no bank has in-house talent to do all this, and said preparation for this is imperative as he thinks “none of this is really futuristic, but it requires a much stronger marriage between information technology and financial engineering, with an important role for practical industry knowledge and incentive design”. “It is important that we streamline and reduce the overlaps between the jurisdictions, and specify clear triggers or situations where one authority’s oversight is invoked”, he said at the banking summit organised by the Indian Banks Association and Ficci.
Agencies like the Comptroller and Auditor General and Central Vigilance Commission should get involved only in extraordinary situations where there is evidence of malfeasance, and not when legitimate business judgement has gone wrong, he said. “Too much coaching by central authorities will lead to a sameness in public sector banks”.
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), the custodian for the government’s stake in banks – should focus only on appointing directors to represent the government stake on the bank boards, Rajan said.
“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”. The RBI governor said there is a need to be more liberal in allowing local hires.
“To have local information, be comfortable with local culture, be locally accepted, and be competitive in low-priced rural areas”.
All public sector entities across the world tend to pay more than the private sector to lower-level employees, and less than the private sector to higher level staff. This means that even while committees may take the final loan decision, some senior banker ought to put her name on the proposal, taking responsibility for recommending the loan. An increased emphasis on performance evaluation, including identifying low performers with the intent of helping them improve, may be warranted, he said.
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Rajan said as banks adopt differentiated strategies, they should move away from common industry wide compensation structures and common industry wide promotion schemes across all public sector banks.
