Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday stressed the need for public sector bank (PSB) boards to be given more freedom to chalk out their strategies. The outgoing governor also spoke in favour of differentiated banking, saying that as banks get cleaned up, and their boards are strengthened, their boards should focus on an appropriate structure as part of an overall rethink on strategy. Rajan also proposed that senior bankers take responsibility for loan proposals even while committees took the final decision to sanction the credit. “Systems within banks should be able to pull up overall performance records of loans recommended by individual bankers easily and this should be an input into their promotion,” the governor suggested.
Delivering the inaugural address at the Ficci Banking Conference, the governor observed it was important bank boards be free to determine their strategies. “Too much coaching by central authorities will lead to a sameness in public sector banks that successive gyan sangams have criticised,” Rajan said. According to Rajan, over time as the bank boards are professionalised, they should be deciding on the appointments of executives rather than the Bank Board Bureau (BBB). Consequently, the BBB — as it transforms into the Bank Investment Company or the custodian for the government’s stake in banks — should focus on appointing directors to represent the government.
The governor observed that while the BBB, which comprises personalities with integrity and domain experience, has taken over part of the appointments process in public sector banks, the government still had a role to play. “First, the final decision on appointments is taken by the appointments committee of the Cabinet.
Second, appointments of non-official directors on bank boards still lie outside the BBB,” he explained, adding that as the BBB gains experience, it would make sense to allow these decisions also to be taken by it.
At present several authorities — Parliament, the department of financial services, the BBB, the boards of the banks, the vigilance authorities and regulators and supervisors including the RBI — monitor the performance of the public sector banks.
The governor said that with so many overlapping constituencies to satisfy, it is a wonder that bank management has time to devote to the management of the bank. “It is important that we streamline and reduce the overlaps between the jurisdictions of the authorities, and specify clear triggers or situations where one authority’s oversight is invoked,” he added.
Rajan said that management efforts to tighten practices are also needed. Far too many loans, he said, are given without adequate due diligence and without adequate follow up. “Collateral when offered is not perfected, assets given under personal guarantees not tracked, and post-loan monitoring of the account can be lax,” he added.
The governor expressed concern at how difficult it was for PSBs to attract talent at the lower levels. While the middle management ranks of public sector banks are being thinned by retirements, he said that PSBs need experts in specific areas like project evaluation and risk management.
He said that banks need to reduce bloated cost structures. “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 employees,” he said, adding that it makes it hard for them to attract top talent, but makes it easier to attract good people at lower levels.
“One of the difficulties public sector banks have is court judgments that prohibit hiring from specific campuses. This leads to anomalies like the public sector bank-supported National Institute of Bank Management sending most of its high-quality graduates to work for private sector banks,” Rajan said.
The outgoing governor also spoke in favour of differentiated banking in India. He said that while some banks may be best off focusing on local activity and, in effect, becoming small finance banks, others may be best off merging with other banks so as to obtain scale and geographic diversification.