Editorial. A longer tenure for PSB chiefs will foster greater accountability

The Centre’s decision to allow Managing Directors (MDs) and whole-time directors at public sector banks to be appointed for a total tenure of 10 years instead of the five years permitted now, will provide a much-needed breather for these banks. Presently, these top officials are appointed for three-year terms extendable up to five years, with an upper age cap of 60.

The move is clearly designed to address the dearth of top management talent afflicting PSU banks of late. It was only last week that the government filled Executive Director (ED) positions in as many as ten PSU banks, mainly through lateral moves. Extended tenures for top executives, apart from addressing the issue of talent shortage, may give greater time to better prepare the next line of talent for the top job. . The ideal tenure for MDs, CEOs and whole-time directors of banks has for long been a vexatious issue. Only last year, in an effort to strengthen governance structures at private banks, the RBI capped the tenures of their professional MDs and CEOs at 15 years, while setting the age limit for Chairpersons and independent directors at 75. Extra-long tenures for top executives at private banks have fostered governance problems, with these executives amassing disproportionate influence over lending and exercising undue clout over Boards. But PSU banks, with their extremely short three-year tenures for CMDs, have equally struggled with a lack of accountability.

The trend of PSU banks accumulating a pile of non-performing assets in the previous lending cycle was blamed directly on the short tenures of the CMDs. Until 2018, it was quite the norm for outgoing chiefs of PSU banks to leave behind ostensibly clean books, only for the incoming CMD to discover skeletons in the closet that entailed large write-offs. It is desirable for bank chiefs to preside over lending for at least an entire economic cycle so that they have some skin-in-the-game. This will also allow learnings from bad decisions to be used to improve the quality of lending. The extension of tenure also comes at a very interesting juncture, when a new corporate credit upcycle is gathering pace. How well the new MDs and CEOs utilise their tenure to create a high-quality corporate loan book would be revealed by 2027, when recent loans would see a full cycle.

But lengthening the term of office for top executives of PSU banks fixes only a part of their problem. Retaining talent at chief general manager and ED levels, which are key roles, may be an issue if the superannuation age remains capped at 60. In private banks, superannuation of top executives is relaxed based on individual merits of incumbents. What also needs attention is PSU banks’ continued difficulty in attracting talent to their entry and mid-level positions. Bringing about greater pay parity between PSU banks and their private peers, using variable pay structures at PSBs to encourage meritocracy, and using new routes for talent acquisition such as campus placements, are more critical than before.

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