A government-appointed panel has recently recommended autonomy for public sector banks to have their own wage structure. Among other things, the panel, headed by A.K. Khandelwal, former chairman and managing director of Bank of Baroda, has made a strong pitch for stock options for top 15% performers in each bank, better remuneration for CEOs and distribution of 2% of net profit towards incentives and rewards. The panel is also in favour of 50% direct recruitment of officers against the current norm of 25%. It wants appraisal of senior officers to be on the basis of feedback from colleagues, subordinates and customers.
The biggest problem for the state-run banks, which account for roughly 70% of the Indian banking industry in terms of assets, is that these banks cannot hire competent professionals because they cannot offer them market-related pay. Even if they get them at the entry level, they cannot retain them.
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Almost all Indian banks are adequately capitalized. Unlike some of the large banks in the US, they didn’t need any bailout by the government when the global meltdown in 2008 in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc. led to a never-seen-before credit crunch.
But they are perennially short of human capital and neither the government nor the boards of these banks bother much about this. Had the banks cared to address this, they would have dismantled the industry-wide wage pact long back. The latest wage pact, a five-year agreement that the trade unions signed with the Indian Banks’ Association (IBA), a national bankers’ lobby, has offered bank employees a 17.5% hike in salary.
The industry pact curbs the profitable banks’ freedom to offer handsome remuneration to their performing employees and encourages the laggards to keep the non-performers happy. It should be dismantled because the industry doesn’t need a standardized wage structure since productivity of employees and profitability of banks vary widely. A few progressive bank chiefs have tried campus recruitments at reputed business schools and offered salaries comparable with the big software firms such as Infosys Technologies Ltd and Tata Consultancy Services Ltd but after a few years they gave up as the ultra-low annual increment structure in the state-run banks made them uncompetitive in the market place.
In the past five years, India’s new private banks and foreign banks have rapidly increased their employee strength to keep pace with asset growth but, for some public sector banks, the headcount has actually come down although assets have grown substantially. According to an IBA estimate, public sector banks, which collectively employ around 700,000 employees, need 500,000 new recruits in next five years to maintain growth. At the start of the last decade, at least 100,000 employees left the industry, responding to the first-ever golden handshake programme in the sector. Since then, there have not been too many recruitment drives. The common recruitment board for the industry was dismantled a few years ago and banks were allowed to recruit staff directly but they have not been able to attract talent as they cannot pay.
A large number of employees, who joined the industry in the 1970s after a group of private banks was nationalized, will retire in the next few years. In the absence of fresh recruitments, the average age of a public sector banker is now about 50, at least 20 years more than her counterpart in new private banks. In most public sector banks, there are more clerks than officers and some of the officers were originally messengers, peons and clerks. Typically, once a peon or a messenger boy becomes a graduate studying in night schools, the employee gets promoted as a clerk. The person can become a junior officer by the time she approaches 50. Those belonging to the underprivileged sections can make it a little ahead of the others.
The government also doesn’t have any policy for appointing CEOs. Intense lobbying by business houses, politicians, bureaucrats and even ministers generally precedes the appointment of most CEOs. Apart from a two-year residual service nothing else seems to be important while choosing a CEO and even this criterion is also selectively waived. Besides, there is no uniformity in the procedures of choosing the head of a bank. While some bankers need to prove their worth as CEOs of smaller banks before moving to a larger bank, a few others can head big banks in their first assignments as a CEO. Essentially, the rules get created or broken, depending on who is in the fray. Also, there are not many choices before the appointments board as it needs to pick the right candidate from the available pool of public sector bankers who are “senior”, but not necessarily always talented. Till such time the pay packet is market related, no outsider will be interested in joining.
On one issue, I don’t agree with the Khandelwal panel—its recommendation for the coveted maharatna status for the country’s largest lender State Bank of India and navaratna and miniratna tags to other state-owned banks. Such tags give more autonomy to public sector undertakings on investment and other matters. For instance, a maharatna public sector undertaking can invest up to Rs5,000 crore in one project without the government’s approval. The banks do not need such tags as they do not depend on the government for their investment decisions. The finance ministry will probably continue to play the role of the super regulator for the financial system but the freedom to pay its employees alone can change the face of public sector banks.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at email@example.com