Quite a few phone calls, emails and text messages from commercial bankers, central bankers and even government officials—both working and retired—have encouraged me to write a sequel to my last week’s column “Are PSU bank heads feudal lords?” The objective is not to defend public sector bankers, but dissect the culture as many are saying the feudal attitude is a symptom and not the disease. While some of the readers say the feudal approach of CEOs is not unique to the public sector banks, and is present in most public sector units across industries, others are of the opinion that even a few private bank chiefs behave the same way. A reader has even named the chief of a private bank and cited one incident that does not show the gentleman in the best of light.
Interestingly, almost everybody (including two retired bureaucrats) blamed the government for all problems. When you are underpaid, overworked, worshipped by borrowers with fat money bags and surrounded by colleagues who do not dare to question your decisions, you are bound to carry a bloated ego and become a conceited boss. However, one must admit that everybody does not become a feudal lord—only a few tread this path and fewer even go beyond that and end up compromising their integrity.
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But why should we blame the government? For many reasons. First, it does not pay the PSU bankers well. Second, it does not allow them to pick up talent from the market who can share their workload and question them (again, because of the poor pay packet). Third, the banking division of the finance ministry treats their banks as an extended arm of the government and, finally, there is no transparency in the appointment process of CEOs and executive directors of banks.
A transparent and merit-based appointment process can change the scenario for the better. Currently, the government, the majority owner of the PSU banks that account for roughly 70% of the nation’s banking industry, does not have any guidelines in place for the appointment of CEOs. The norms get changed and customized to accommodate individual candidates.
This means one senior banker may not be able to become the CEO of a bank because the person doesn’t have a two-year residual service, but another senior banker can become the CEO of another bank even though he has less than two years to retire. Similarly, for certain professionals, it is mandatory to run a small bank before shifting to a large bank, but others can lead a large bank even as their first assignment. It all depends on how well-connected you are with the bureaucrats of the ministry, politicians and even corporate houses.
According to one financial sector commentator, state-owned banks always run the risk of creation of non-performing assets (NPAs) as many corporate houses who throw their weight behind certain candidates to run certain banks get their loans restructured later and such loans turn bad. I am not sure whether there is any truth behind such allegations, but there is no doubt that the poor pay packet of the CEOs spoil the culture.
How much does a public bank’s CEO earn? After the latest round of pay hike, on average the annual gross income of a bank chairman is Rs 16-18 lakh. If one takes into account the performance-linked bonus, the annual package can go up to Rs 26 lakh. A few years ago, the government introduced the performance-linked bonus system whereby each bank signs an agreement with the majority owner at the beginning of the year on certain targets such as growth in profit, advances, deposits, etc., and depending on performance, a CEO can get a maximum Rs 8 lakh bonus. Is this enough? Many chiefs of private banks earn 10 times more than their counterparts in the public sector even though in terms of assets their banks could be one-fourth or even smaller than a public bank.
Poor pay packets can encourage public bankers to find innovative ways to make a little money without breaking any rules. For instance, overseas tours can be frequent as for a $500 per day allowance, no bills are to be presented. Typically, the CEO of a bank that has branches overseas can spend 20 days abroad (to visit the branches), and CEOs of banks that don’t have overseas operations, can go for 10 days (to meet foreign investors, correspondent banks, or get a first-hand experience of best practices of other banks).
One can spend more days overseas with the ministry’s clearance. One can say that $500 is not enough for a day to stay in a suite in a fancy hotel in US and Europe, but since there is no requirement to produce receipts, one can always feel happy with this arrangement, staying with local colleagues, friends or relatives. Incidentally, for tours within India, receipts are required as banks directly clear the hotel and travel bills, and the per day allowance is only Rs 1,200.
Apart from visiting branches, attending board meetings of foreign subsidiaries can also become important for many CEOs as it entails hefty sitting fees. Higher pay packets, bonus, stock options and profit-sharing arrangements can change the dynamics of foreign travels. The former chief of a private bank was known for his impeccable integrity. Every time he visited a branch of his bank, he would pay for his tea, coffee and lunch. Many such bank bosses would not do that, but I will not blame them. A senior executive of a very large public bank who lives in tony south Mumbai at an office flat once told me he can’t afford a dozen alphonso mangoes in late March and early April when the first batch arrives in the market.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email your comments to email@example.com