The government has initiated measures to select and appoint chairpersons of 8 public sector banks (PSBs), according to press reports, after cancelling the earlier list of short-listed candidates. The issue was recently examined by a well-represented committee chaired by P J Nayak. The committee observed that the process of selecting the top management of banks, including the chairperson needs to be professionalised. According to the committee report, at present, the department of financial services (DFS) in the finance ministry prepares a short list of candidates who are interviewed, sometimes, for less than five minutes by a selection sub-committee consisting of the secretary, DFS, and the deputy governor of RBI.
The selection of the chairperson of a PSB is a serious issue as large amounts of public money are involved as also public trust as PSBs account for nearly 70% of the banking assets. Public sector ownership implies that taxpayers are the owners of the bank. Therefore, the selection process has to be very rigorous. As the representation of the general public is crystallised in Parliament, and therefore in the government, it would be appropriate if at least one person in the panel of selectors comes from Parliament, preferably the finance minister or the minister of state. After all, as owners, if anything goes wrong with the working of the PSBs, then the minister is answerable to Parliament. Further, in view of the diverse duties to be performed, it can be justifiably argued that the selection panel should have a management expert, an economist, a psychologist, and a retired senior level police officer in addition to retired chairpersons of a PSB and a private bank. The potential candidate should be able to convince the panel of experts about the knowledge of the bigger picture in which the banking sector is expected to perform and offer a game plan to position the PSB to face higher competition. If the PSBs have to compete successfully with foreign and private banks, the chairperson has to be equally competitive, with a clear vision and mission.
The banking sector is passing through a challenging transition, with new age banking, especially driven by technology. The new age banking involves spread of ATMs, call centres, online banking, mobile banking and use of big data analytics. The financial inclusion drive, with few crore new clients, will bring new challenges in terms of volume of operations, product design and demand for services. The management of PSBs has also to prepare for a diverse spectrum of clients ranging from first-timers to technically-savvy customers preferring the exclusive 24X7, online seamless banking experience.
Again, as per the Nayak Committee, there is no search committee stipulated for the top positions of PSBs. The shortlisting occurs on the basis of demographics associated with cadre of executive directors (ED) and general managers in all PSBs. In the recent years, with the extension of banking activity and a lack of man-power planning, there is a shortage of potential candidates who are eligible for the chairpersonship of PSBs.
Therefore, compromises are made in terms of experience at senior levels in promoting individuals to higher positions. In fact, the expertise required to manage the bank, are different from operational banking. To develop managerial skills, either the employee gathers expertise and maturity by working for years as ED or else, this is supplemented by extensive training. Only then can an individual effectively lead the PSBs through challenging competition from private and foreign banks.
To search for candidates in an environment of global competition, it may be useful to open the selection process to senior officials from private and foreign banks. Such officials could bring dynamism to the PSBs. To serve as a headhunter, a dedicated Banking Service Commission for Top Management (BSCTM), on the lines of the Union Public Service Commission can also be considered. BSCTM could provide credibility to the search process.
On what basis is a particular bank assigned to a specific candidate should also be transparently delineated. In many instances, a cadre officer of a bank with extensive network of branches in North India takes over as chairperson of a bank with extensive branch network in South.
Consequently, as banking is closely connected with cultural values and social norms, there is friction between the chairman’s secretariat and the banking staff. Similar is the difference in working culture between large and small banks.
To attract the best talent available in the banking industry to serve top management positions in PSBs, four things need to be addressed. First, the tenure of the Chairperson which according to the Nayak Committee is sometimes only about 18 to 24 month.. The government could consider a longer tenure of 5 years, based on strict performance evaluation criteria. Second, the retirement age in public sector banks is 60 years. To harvest the experience of capable persons who have successfully emerged through the system, the government could consider extending the age limit for senior level managers, as already extended to 70 years for private sector banks. Probably, a good example is the graduated retirement age model successfully followed in the army. Third, remuneration has to be commensurate with the position and relative to those in similar institutions. Finally, once, international standards of selection are met, the government should set steep performance benchmarks and undertake strict performance appraisals. In the evaluation process, existing Indian Banks Association can play an important role in providing peer reviews to the evaluating authority.
The existing selection system could have worked well for the past decades but in view of the challenges, both existing and emerging, changes are necessary. It is therefore essential that this important aspect of selection of chairpersons of PSBs is transparently examined and a suitable policy formulated. The government has pioneered new ways to achieve financial inclusion and the reforms in selection practice and procedures would only strengthen that process.
By Charan Singh
The author is RBI Chair Professor of Economics, IIM Bangalore