Mumbai: The Reserve Bank of India (RBI) is continuing its efforts to loosely regulate the salaries of bankers and has sent out a letter to banks seeking information on how they decided the salaries and bonuses of people heading the treasury department—a key division responsible for generating a significant portion of a bank’s profits.
The chief executive officer of a private sector bank who spoke on condition of anonymity confirmed receipt of the letter from the central bank.
RBI didn’t respond to an e-mail seeking comment.
Another chief executive officer of a private sector bank denied receiving such a letter, but said: “There has been a discussion in the Reserve Bank of India on monitoring and approving the compensation package of banks’ senior management which would include the managing director and chief executive officer, executive directors and heads of business segments.”
RBI’s efforts come in the wake of an outcry across the world at the huge salaries paid to bankers—widely seen as the people responsible for the financial crisis of 2008 that set off a global economic slowdown.
Earlier this week, US President Barack Obama spoke against “fat cat” salaries during an appearance on 60 Minutes. To be sure, salaries of the heads of public sector banks account for almost 70% of India’s banking system.
The second chief executive officer added that Basel II norms required RBI to monitor and regulate these salaries. Basel II refers to an international accord on banking that was arrived at in 2004 and which seeks to arrive at standards for banks—in terms of provisioning, capital and other parameters.
RBI has articulated its desire to set guidelines for salaries in its second quarter review of the monetary policy for 2009-10. It is working in consonance with standards defined by the Financial Stability Board (FSB) on compensation. FSB—comprising senior representatives of national financial authorities (central banks, regulatory and supervisory authorities and finance ministries), international financial institutions, standard-setting bodies and committees of central bank experts—was established in April 2009 to address vulnerabilities and to develop and implement strong regulatory, and supervisory policies to maintain financial stability. FSB is the successor to the Financial Stability Forum, which was formed in 1999.
“The Reserve Bank of India clears the compensation package of chief executive officers of banks. They have always been curious about the bonuses given at foreign bank. In the light of the current crisis in the global world, the central bank wants to be cautious and also align its compensation norms in line with the Financial Stability Board principles,” said a banking expert with a global consultancy firm. “This could be also to ensure that officials do not take unwanted risk which could affect the institution’s profitability and reputation of the organization,” added this person who did not want to be identified.
Last year, several banks here were dragged to court by companies that alleged that they had been mis-sold derivatives which actually increased their risk, instead of reducing it. The treasury department is the one responsible for advising customers on such transactions.
Currently, RBI clears the remuneration of chief executive officers of private and foreign banks on a case-by-case basis after the compensation committee at each bank clears it. Chief executive officer salaries at public sector banks are set by the government.
Employees of public sector banks, however, are paid in accordance with an industry-wide wage pact that lasts for five years.
In some banks, especially foreign ones, the treasury head earns more than the chief executive officer if one includes the bonus, said the chief executive officer of a foreign bank who did not want to be identified given the sensitivity of the issue.
The bonuses given to heads of treasuries peaked in 2007; some dealer heads of treasuries at foreign banks were given bonuses of $2.5-3 million (Rs11.7-14 crore today) that year, said a dealer with a foreign bank who spoke on condition of anonymity. This number has since come down to an average of around $1 million in 2008 and 2009, added this person. And increasingly, many banks are paying this out in parts, across three or five years.
FSB principles on compensation that have been endorsed by the Group of Twenty countries have proposed that bonuses and incentives be paid over a period of time.
FSB recommends that this period be not less than three years, provided it is aligned with the nature of the business, and risks and the activities of the employee in question. It also says an independent and effective board has to oversee compensation practices, linking total variable compensation pool to the overall performance of the firm, and maintaining a sound capital base.
FSB has suggested limits on guaranteed bonuses, enhanced public disclosure and transparency of compensation, and supervisory oversight of pay, including sanctions if necessary.