Mumbai: Finance minister Nirmala Sitharaman on Friday announced a slew of long-pending reforms for public sector banks (PSBs) to make them more competitive.
PSB boards will now be allowed to appoint chief risk officers from the market and, to get the best talent, they may be paid market-linked compensation, said Sitharaman. Besides, the lenders may have four executive directors with specialization in technology.
“The governance reforms of banks are of great significance to make banks run professionally. It is as important as the consolidation announcement," she added.
The boards will have the flexibility to prescribe residual service of two years for the appointment of senior managers, starting from general managers (GMs). It will also be empowered to decide on individual development plans for senior executives so that succession planning is smooth, besides appointing chief GMs if necessary. Sitharaman also said that the boards will be allowed to appraise the performance of GMs and other senior employees, and the management will be accountable to the board.
Also read: What do PSB mergers mean for account holders?
The government is also considering longer tenures for directors on the board’s management committee, besides empowering the committee to evaluate high-value loan proposals. Sitharam said the boards will be given flexibility to increase sitting fees of independent directors and to train directors for induction and specialized purposes.
Also read: Larger banks stand to benefit more from merger as capital adequacy improves
In June, Reserve Bank of India (RBI) governor Shaktikanta Das had said the central bank would focus on governance reforms in the banking space to improve transparency and accountability. His statement came amid rising instances of bank fraud and deteriorating asset quality. “The government, the Bank Board Bureau and the Reserve Bank are engaged in developing an objective framework for performance evaluation of public sector banks. This should redefine the contours of corporate governance in PSBs with a focus on transparency, accountability and efficiency," he had said at the convocation address at NIBM.
Former governor Urjit Patel had also sought for more powers to oversee PSBs under the regulation of RBI to ensure governance reforms. Currently, the Centre regulates PSBs under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; the Bank Nationalisation Act, 1980; and the State Bank of India Act, 1955.
Abizer Diwanji, partner at audit and consulting firm Ernst & Young, said: “These governance reforms are not really far-ranging but peripheral in nature. Why should the government appoint only a CRO at market-linked compensation? Why can’t they appoint other senior managers too at the market rates? With these reforms, government still haven’t distanced itself from governance of PSU banks while its role should be limited only to that of a shareholder. However one positive announcement is the steps on capacity building measures introduced at the general manager level and above."
In 2014, the PJ Nayak Committee—appointed by RBI to provide a road map on governance reforms—had addressed a variety of issues, including dual regulation, board constitution, difficulty in categorizing any director as independent and growing differences with private banks in skills and salary levels.