Outgoing Reserve Bank of India (RBI) governor Raghuram Rajan has stressed the need to improve governance at 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).
At present, the Centre appoints the chief executive, executive directors and other board members.
Mr. Rajan’s suggestion is in line with the proposals of the P.J. Nayak committee 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 said as the BBB was gaining experience in the appointment process, the final decision on appointment of executives and of non-official directors on bank boards should be left to it.
The Centre set up the BBB in February this year under the chairmanship of former Comptroller and Auditor General of India Vinod Rai. At present, BBB is involved in the short-listing and selection process of public sector bank executives. The final appointments are made by the government.
Mr. Rajan also highlighted another challenge that the public sector banks are facing — retirement of staff, particularly those from the middle management.
To fill the ranks in middle management that have been thinned out by retirements, banks should look for talent with expertise in project evaluation, risk management and IT, including cybersecurity, he said.
“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 said rewards like Employee Stock Ownership Plans (ESOPs) that give all employees a stake in the future of the bank might be helpful. “None of these changes are easy, but they are also not impossible,” he emphasised.
The RBI governor opined that public sector undertaking employees at the lower levels were overpaid, while those at the top level were underpaid.
“One of the problems, of course, is that as with all public sector entities, you overpay at the bottom and underpay at the top… Yes, you feel that you are doing the job for the broader public, but you just make it harder to attract top talent, especially a lateral entry,” he said, adding in a lighter vein: “I also feel underpaid.”
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 — more generally between banks and other financial institutions, to encourage competition among them.
With several new niche banks set to begin operations over the next six to seven months, Mr. Rajan 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.
The environment would also be challenging because competition and novelty constituted a particularly volatile mix in terms of risk, Mr. Rajan added.
