Outgoing Reserve Bank of India (RBI) governor Raghuram Rajan emphasised on improving governance in public sector banks and said the task of appointing top executives and non-official directors in these entities should be left to the Bank Board Bureau (BBB). The government, at present, appoints the chief executive, executive directors as well as other board members.
Mr. Rajan’s suggestion is in line with the PJ Nayak committee proposal, which was set up by the RBI to look into the issue of governance in Indian banks.
“A parallel task for public sector banks was to improve the governance and management,” Mr. Rajan said in his speech at the FICCI-IBA banking seminar.
He suggested that as the BBB gains experience in appointment process, the final decision relating to appointments of executives and of non-official directors on bank boards should be left to it.
The government has set up the BBB in February this year under the chairmanship of former comptroller and auditor general of India, Vinod Rai. At present, the BBB is involved in the short listing and selection process of public sector bank executives but the final appointment is made by the government.
The governor also highlighted another challenge that the public sector banks are facing, that is, retirement of staff, particularly from the middle management.
Mr Rajan said to fill out the ranks of middle management that have thinned out by retirements, banks should look for talent with expertise in project evaluation, risk management, and IT, including cyber security.
“Solutions like persuading courts to allow some campus hire, making bank entrance exams much less onerous to take, with applications, tests, and results, wherever possible, available quickly and online and to have more freedom to hire locally, and pay wages commensurate with the local labour market should be considered,” he said.
In this context, he also said rewards like Employee Stock Ownership Plans (ESOPs) that give all employees a stake in the future of the bank might also be helpful. “None of these changes are easy, but they are also not impossible,” he emphasised.
He also said 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 to encourage effective competition among them.
With several new niche banks will start operations over the next 6-7 months, the governor said ‘the current times are interesting, profitable, and challenging for the financial sector.’
“Interesting because the level of competition is going to increase manifold, both for customers as well as for talent, transforming even the sleepiest areas in financial services; profitable because new technologies, information, and new techniques will open up vastly new business opportunities and customers,” he said adding that it will be also challenging because competition and novelty constitute a particularly volatile mix in terms of risk.
