While discussing a large public sector bank’s (PSB) performance with its senior management team in December, the Union government nominee on its board, a bureaucrat of the finance ministry, cited instances of PSB bosses being sacked. Over the last two years, there have been three such instances, one each in the North, West and East.
In closed-door meetings with the chief executive officers (CEOs) of PSBs, the ministry these days makes power-point presentations to show how some of the private banks are way ahead of PSBs, when it comes to performance.
The general perception is that PSB chiefs are not accountable, and at least some of them lack dynamism. In turn, these CEOs, always in private, blame their board and the vigilance wing of the government for their lack of motivation and alleged non-performance.
The reality is that both the board and the vigilance department curb their freedom. The department, for instance, can harass them even after their retirement. While CEOs believe that most loan-decisions are driven by commercial interests, the vigilance folks often smell corruption. On top of this, demanding parliamentary panels visit PSBs periodically to get a feel for the progress in areas ranging from the use of Hindi in offices to credit disbursal to minority segments of society.
Private banks are neither covered by these parliamentary committees nor the Right to Information (RTI) Act, under which PSB CEOs are bound to answer questions such as whether their spouses are using an office car or whether they stay at a colleague’s house while pocketing the daily allowance on their overseas trips. (These are both real questions asked under RTI, by the way.)
The government is trying to address the twin factors: (lack of) accountability as well as performance, by offering incentive packages. A PSB chairman can now aspire to get as much as Rs8 lakh in annual performance-linked bonus and the executive director up to Rs6.5 lakh. Even if the CEO is not a hot performer, he can manage Rs6 lakh, which is higher than his annual salary.
Who will appraise their performance? Well, each bank is setting up a compensation committee of the board, consisting of the nominees of the government and the Reserve Bank of India, besides two other board members. How would this panel evaluate their performance? The government, in consultation with the Indian Banks’ Association, the premier bankers’ body in the country, has prepared a performance metrics. The performance metrics will judge a CEO on nine parameters, related to business-growth underlined in the statement of intent that each bank board signs with the finance ministry at the beginning of each financial year.
These include growth in five segments: core deposits (read non-institutional deposits), advances, agricultural advances, loans to small and medium enterprises (SME), and loans to weaker segments of society. The other parameters are cutting gross non-performing assets (NPA), return on assets, net profit and cost-income ratio. The maximum weightage (15%) is given to reduction NPAs, while loan growth to SMEs and weaker segments carry the minimum, 5% each. All other parameters have a 10% weightage.
All these add up to 85% and the rest 15% covers subjective assessments of a CEO’s leadership qualities, human resources development efforts and initiatives on the information technology front (5% each). For the executive director, the focus is on customer service, adherence to the ‘know-your-customer’ norms, and quality of compliance and inspection.
A CEO who scores 100% will get a bonus of Rs8 lakh; a score between 81% and 99% will fetch him Rs7 lakh and between 61% and 80% Rs6 lakh. For his deputy, the slabs are Rs6.5 lakh, Rs5.5 lakh and Rs4 lakh.
Now, let’s take a closer look at the performance appraisal metrics. 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. Moreover, it’s possible to grow the deposits by paying higher interest rates. Traditionally, banks also disburse advances to corporate clients as the year-end approaches and the same money comes back in the form of deposits. In other words, deposit and advance growth can be, well, manipulated. Reduction in gross NPAs is also possible by writing off bad loans and bloating the advance portfolio.
A more scientific way of judging a bank’s asset quality could have been looking at the accretion of fresh NPAs. Similarly, a CEO should also be judged on return on equity and earning per shares. After all, most of the banks are listed entities and CEOs are answerable to millions of investors.
Unlike a mutual fund that is judged by the net asset value on a daily basis, a bank or its CEO cannot be judged on a single parameter. The government has made a beginning in making CEOs accountable. Now, it should open up the appointment procedures. A professional committee can do this better than the finance ministry-appointed panel that does the job now. Also, with a better compensation package, banks can start looking at drawing people from the marketplace. Finally, it is not the size of the balance sheet, but the health of a bank that should determine the annual package of CEOs. The weaker the bank, the fatter the pay packet should be, as turning around a weak bank is a bigger challenge than running a relatively sound, mega bank.
Tamal Bandyopahdyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to firstname.lastname@example.org.