×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Health checks for CEOs

Health checks for CEOs
Comment E-mail Print Share
First Published: Mon, Apr 09 2007. 12 32 AM IST
Updated: Mon, Apr 09 2007. 12 32 AM IST
This refers to the article ‘Link CEO’s reward with bank’s health’ by Tamal Bandyopadhyay, Mint, 26 March.
The introduction of an incentive package for CEOs of public sector banks (PSBs) by the ministry of finance is path-breaking. It addresses a long-standing demand of most PSB chiefs who complained that their remuneration is grossly inadequate compared to the size of business they handle and the extent of responsibilities they shoulder. This is particularly true when compared with the hefty salary packages of their counterparts in private-sector banks. Viewed in this backdrop, the finance ministry’s incentive scheme is certainly a major step in addressing this demand of the heads of PSBs. And, at the same time, the government has tried to bring about a fair degree of transparency in the scheme by linking the incentives to actual performance which, in turn, will be judged on the basis of certain predetermined and measurable parameters.
The writer, while analyzing the package formulated by the government, has overlooked certain key issues. Some of the points he has raised and my comments on those are as follows:
(i) “Growth in Advances and Deposits account for 40% of the total score. Some 10% is allotted to growth in advances and another 20% to advances to agriculture, small businesses and weaker sections, even though the overall advance portfolio includes all these. The board of a bank, headed by its CEO, sets the targets for growth in these segments. Theoretically, therefore, one can always set an achievable target at the beginning of the year.”
While it is true that the board, headed by its CEO, sets the targets at the beginning of the year, my understanding is that the targets set have to be approved by the board as well as the ministry of finance (MoF). The government-nominee director on the bank’s board will ensure that the targets set reflect a healthy growth over the previous year. In addition, the targets are also scrutinized by the MoF and wherever it is felt that the targets need to be improved, the bank is asked to review them. Thus, it might not be easy for a CEO to set a target which at the outset would be easy to achieve.
(ii) “Moreover, it’s possible to grow the deposits by paying higher interest rates.” The evaluation metrics state “Growth in core deposits”. Core deposits include deposits which are accepted by banks at the prevailing card rates.
As most of the bulk deposits raised from large companies would be at a preferential rate of interest, i.e. higher than what banks offer to other customers, these would not qualify to be included as ‘core deposits’. In case a bank decides to raise high-cost bulk deposits from corporate customers to meet deposit targets, its ‘Net Interest Margin’ will be impacted which, in turn, would result in lower profits. Lower profits would result in lower ‘Return on Assets’. Thus, manipulating deposits and advances to achieve targets will have a negative impact on the profitability parameters.
(iii) “Reduction in Gross NPAs is also possible by writing off bad loans and bloating advance portfolio.”
Writing off bad loans is possible only against provisions made by banks. A bank that does not have adequate provisions for doing so will have to make provisions from the current year’s profits. This, in turn, will have a negative impact on its profitability. Sharp growth in the advances portfolio of most banks could lead to higher NPAs in subsequent years. As it is, banks will be hard-pressed to make adequate provisions for fresh NPAs.
Anita Varma works in the treasury department of a public-sector bank in Delhi. Comments are welcome at yourviews@livemint.com
Comment E-mail Print Share
First Published: Mon, Apr 09 2007. 12 32 AM IST
More Topics: Views |