With the onset of financial sector reforms, many public sector banks (PSBs) have been on a transformation journey in the past two decades. The most important reforms have been in the areas of deployment of modern technology, strengthening of retail orientation, implementation of prudential norms and Basel II recommendations on banking standards.
Anil K. Khandelwal: Former chairman and managing director of Bank of Baroda, chairman of a government committee on human resources in the banking industry
Overall, the banks have performed well, reducing non-performing assets (NPAs) and strengthening balance sheets.
In spite of many positives, one most critical area where PSBs today are seriously handicapped vis-à-vis their competitors in the marketplace is human capital. They have made little headway in undertaking any major human resource (HR) reforms or rearchitecting their HR function, barring some exceptions. The HR function in most PSBs is overwhelmingly maintenance-driven, compliance and control-oriented and industrial relations-focused. Barring some ad hoc measures in promotion methodologies and training systems, the core of HR has lacked any long-term orientation.
Traditional HR methodologies and inadequate HR processes in the area of talent management, performance management and leadership development have further compounded the issue. In the present competitive scenario, when technology is no more a differentiator, PSBs have to compete with new generation private sector banks in product innovations and customer-centric initiatives. The new paradigm calls for a radical change in the HR architecture of PSBs.
The moot question to be addressed here: is focusing on performance from quarter to quarter good enough for ensuring sustained health and long-term future of the organization?
Future competition will be on competencies, learning ability and propensity to manage soft issues to one’s advantage. Are our PSBs geared for this? The issue is to focus on other critical intangibles like HR, culture building, leadership that is vital to the health of the organization. This means that banks need to actively manage both their performance and their health.
HR: a ticking bomb
Overall, the people processes in PSBs appear to be inadequate to meet the demands of new-age banking. In fact, HR has become a new risk—possibly the biggest in the system, considering the new challenges and opportunities of new age banking.
In the last two years, consulting firms such as McKinsey and Co., Booz and Co. and the Khandelwal committee on HR issues of PSBs have diagnosed and highlighted the problems in the HR area and the need for some quick action.
A recent study by McKinsey (2010) makes some revealing observations. It says PSBs will lose half their employees to retirement over the next decade—more than 80% of general managers, 50% of middle managers and 30% of all PSB employees will retire over the next five-six years. This poses a massive recruitment challenge, especially in the context of changing roles and skills requirement. There is a leadership capacity gap of at least 12,000-15,000 people in branches, regions, businesses and functions.
The Khandelwal committee (2010) has also said:
• HR has lagged behind banking reforms. HR function is best managed by neglect.
• Bank-level initiatives are extremely limited. HR does not find a place in the strategic management matrix of banks.
• HR is highly transactional, ad hoc and inadequately professionalized, with high degree of standardization, militant trade unionism, restrictive mobility of staff, absence of a reward mechanism and serious gaps in succession planning.
• Automation of HR administration is limited. Outsourcing of non-core activities is also limited.
• Employee engagement strategies are patchy and ad hoc.
• The performance management system and its administration are generally routine and nebulous. In many banks, clerical staff are not covered by the appraisal system.
• Human resource development (HRD) is equated largely with promotions and training. Top and senior-level management positions are created in an ad hoc manner and in some cases, the number of top positions is not commensurate with business dynamics.
• Most PSBs do not have any worthwhile manpower planning. It is not organically linked with strategic and business plans.
• Progress in business process reengineering and change management is tardy in most PSBs.
• PSBs have a substantial underutilized talent pools.
• Diversity management and associated issues are given inadequate attention.
In spite of enormity of the issue and long-term risk of its neglect, HR is seldom monitored by the government or the regulator or even by the banks’ boards. It would appear that a hands-off policy is being followed with regard to HR by policymakers.
Suggested action plan
It’s time some fundamental measures are taken to provide an architecture for HR that would sustain the banking system. An action plan is suggested here for the new HR architecture.
Introduction of bank-level wage settlement: The bane of the inchoate development of HR function in banks is the prevalence of industry level wage settlement for too long, leading to standardization in compensation. This is not in harmony with the requirements of new-age banking. Therefore, the introduction of a bank-wise compensation structure is fundamental to the beginning of setting the new reform agenda. This will infuse a sense of ownership and accountability at bank level for linking compensation to issues of profitability and productivity and will also help banks to link pay with performance with wider consequences on motivation.
Enunciation of HR policy: Practically for every function, banks have a written policy document approved by the board. Such documents include loan policy document, risk management policy, etc. For such an important function such as HR, most banks do not have any policy document. In the absence of this, there is wide variation in managing this crucial function by different managements and there is no monitoring by the board or by the regulators to adhere to pronounced policies.
The policy document should clearly lay down the direction of initiatives in the various subsystems of HR such as recruitment, talent management, career planning, employee engagement, succession planning and leadership development. The implementation of the agenda should be closely monitored by the board. This would facilitate engagement of the top management in implementing HR reforms and professionalize the function.
Employee engagement: The challenge before the banks is how to channelize employees’ energies to transform them into active and willing partners in the change process, how to install a credible system to encourage the free flow of ideas and suggestions from staff and how to introduce effective methods to solve grievances. How to motivate them and how to benefit from ground zero wisdom is the core challenge. Banks will need to work out innovative methodologies for employee engagement and motivation.
Succession planning and leadership development: Although most PSBs identify succession as a major problem, few initiatives have been undertaken to tackle it. The problem is exacerbated at medium and small banks, placing them at great risk. Sometimes, even big banks are put to great risk because of critical succession issues.
For example, in one of the largest well-performing banks, the chairman and managing director (CMD), both the executive directors (EDs) and a couple of general managers are retiring in 2012 and vacancies will be filled at the last moment.
As per the present policy, three top executives may come from three different banks for different tenures. It is not uncommon that sometimes CMDs and EDs are placed for tenures under two years. Under these circumstances, any long-term initiatives for reform are a far cry. The whole system of selection of EDs and CMDs requires thorough change.
Quick promotion from ED to CMD sometimes in less than one year and from assistant general manager cadre to ED and CMD in a span of five years does not often provide sufficient opportunities for managers to grow on the job. While they may be talented bankers, they may require adequate leadership grooming to manage large-size organizations such as banks.
Leadership development and succession planning are very crucial issues. The methodology used by most banks in developing senior and top management through sporadic and ad hoc exposures by deputing to different management development programmes in India and abroad, is quite inadequate. There needs to be a well-knit and comprehensive strategy to develop people to take up strategic positions in senior and top positions. The quick promotion system adopted currently to tide over the problems of finding successors to retiring top management levels without rigorous leadership grooming is far from adequate in meeting the new challenges. The tendency to fill the positions will not serve the purpose.
A comprehensive strategy will have to be put in place for leadership development. The most immediate step would be to improve the selection methodology for ED and CMD.
Selecting them through a brief process of interview is inadequate. The best way would be to create an industry pool of PSB general managers for identifying the potential candidates through the assessment centre methodology for qualifying for the post of EDs and CMDs.
Dealing with unions: For too long the agenda for HR management has been dictated by trade unions. Their strategy is focused on standardization of wages and service conditions and creation of more jobs. This works counter to issues of productivity. In the post-technological environment and market-driven economy, enhancement of productivity through efficient use of manpower is key to development.
It is time bank managements renegotiate a new agenda for change with their unions and review the existing settlements and understanding for creating better utilization of staff and removing restrictive practices in deployment and day-to-day working. Managements should take charge of the HR function and take responsible steps to create a sustainable banking system.
Professionalization of HR: Unlike other progressive industries and private banks that hire trained and qualified professionals for HRD, PSBs largely rely on career bankers. Due to lack of exposure to specialized methodology for HR and their short tenures, they are not able to initiate best practices and introduce methodologies for scientific performance measurement, evaluation and talent management.
HR specialization must drive the core element of developmental HR functions, including manpower resourcing and manpower planning, talent management, performance management and measurement, compensation management, leadership development, employee surveys, HR audit and employer branding.
To institutionalize the emphasis on HR, each bank should constitute a committee with two outstanding HR professionals, apart from the CMD and ED. In large banks, the government should create a new position, ED-HRD ,to drive the HR agenda from the top. These steps will create a paradigm shift in the HR function in banks to make them competitive and sustainable.
An emphasis on HR has thus far remained only at the intention level. It is time to move from good intentions to responsible actions. The competitive setting requires an extraordinary emphasis on developing new capabilities, visionary leadership and an engaged and motivated cadre of employees.
The competitive advantage in the future will be derived from hard-to-copy intangible assets such as the quality of manpower, company culture and leadership effectiveness. We can no more compete on the basis of a new product or a new service because sooner or later, everybody will follow suit. Can we, therefore, neglect this crucial issue? It would thus require a collective approach by the government, regulator and bank boards to create a new order for HR. This calls for a major shift in assessing a CEO’s performance.
In conclusion, the time for comprehensive HR reforms is just right for ensuring the long-term health of PSBs in India.
*The human capital key: Unlocking a golden decade in Indian banking–August 2010, McKinsey and Co.
**HR: The next transformation imperative for the public sector bank CEO, 2011, Booz and Co.
***Report of the committee on HR issues of public sector banks–June 2010