Parity please

For India’s public sector banks to emerge from their morass of bad loans, well-governed boards and talented top managers who excel at strategic decision-making, are immediate imperatives. The RBI governor recently reiterated this in his CD Deshmukh memorial lecture, pointing out that as a bad decision by a bank can end up diverting “thousands of crores” in public money, it is essential to have persons of integrity and talent on bank boards. He argued that bank boards should not just be empowered to make autonomous decisions that put commercial interests first, but also offer market-linked pay structures that can help them attract the best talent. While the need for a complete reboot of the governance structures at state-owned banks has been recognised for some time now, pragmatic considerations have stood in the way of moving ahead with this process. For truly autonomous boards at PSBs, the Centre needs to dilute its shareholding in them to levels below 51 per cent. But such dilution has proved almost impossible in a scenario where the depleted coffers of PSBs call for frequent capital infusions from the exchequer. Given the size of the bad loan problem, precarious public confidence prevents the Centre from making any overt moves to withdraw its perceived ‘sovereign backing’ from the beleaguered banks. The legislative logjam in Parliament has also scuttled any possible move by the Centre to repeal the special Acts under which banks such as the SBI are constituted, so that they can be brought under the more stringent governance frameworks of the Companies Act and SEBI’s Listing Regulations.

Nevertheless, the Centre can consider some measures to improve governance standards at PSBs, without resorting to wholesale legislative changes. One, the setting up of an interim Bank Boards Bureau spearheaded by professionals should be enough to ring-fence these banks from political interference and directed lending pressures, provided bank boards can be empowered to induct independent directors, laterally hire top managers, and make the strategic decisions necessary to set their house in order. Two, the Centre can take concrete action to delink the pay scales of top-level executives of state-owned banks from government scales. Current norms that require all PSBs, whatever their size, to offer uniform pay packages to their CMD and board members, are irrational and need to go.

Finally, PSBs must also be allowed to bridge the yawning chasm between their pay scales and those of their private sector peers. Annual report disclosures for 2014-15 reveal that the CEOs of leading private sector banks such as ICICI Bank, Kotak Mahindra Bank and Axis Bank earned annual compensation packages that were between 15 and 30 times those earned by their counterparts in the public sector. Similar disparities exist in the way PSBs compensate their independent board members too. Fixing these anomalies would be the first step in ensuring that the move towards good governance and reforms at PSBs isn’t held hostage by politics.

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