A committee set up by the government to look into HR challenges facing public sector banks has laid out an interesting and important set of recommendations that the government ought to consider very seriously. The five-man committee headed by former Bank of Baroda chairman AK Khandelwal has suggested that banks be allowed to link employee compensation with performance and move to the more flexible cost-to-company (CTC) system of fixing remuneration?these HR practices are widely followed in the private sector, including in competitor private sector banks. Public sector banks have a major problem in retaining talent when their competitors are able to offer significantly better compensation. In fact, many private sector banks have built their strength on cadres that were initially trained in SBI, India?s largest bank by some distance. Also, it makes little sense to mandate all public sector banks to adopt similar payscales. Each bank ought to be allowed to make an autonomous decision based on its own performance and profitability. The Khandelwal committee has sensibly suggested this autonomous course of action as well.
The committee has fortunately not limited itself to simply compensation issues, important though they are. It has made the important recommendation of separating the positions of chairman and managing director/CEO in public sector banks. Again, this is common practice in private sector banks and would help improve the standards of corporate governance. Another important recommendation relates to greater mobility of staff. The committee has recommended that clerical staff be encouraged to move to rural areas?which would help foster financial inclusion. Also, public sector banks must be allowed to outsource some key services that would help cut down costs. These are all eminently sensible and easily doable recommendations. In fact, they are a necessary condition before the government actually begins to focus on more comprehensive banking reform. There is little option in the medium term but to allow more banks to enter the market, and that means more competition, which is, of course, good for consumers. But when that competition arrives, public sector banks deserve a chance to compete on a level playing field. Upgrading their HR practices would help that end.