Banks Board Bureau chairman Vinod Rai is right to be miffed with the government for ignoring its recommendations to reform public sector banks. The BBB must be empowered, now that the government has clarified that it will not scrap the autonomous body. Its original mandate was “to prepare PSBs to take on competition, have the ability to appropriately manage and price risk across business cycles and develop resilience to generate internal capital”. However, the performance of PSBs, that are reeling under a pile a bad loans and now scams, is fragile compared to their private sector peers. Fixing their governance ills calls for broader systemic reforms. This requires ring-fencing PSBs against untoward political interference and meddling, as recommended earlier by the PJ Nayak committee.
The thing to do for the Centre to create a company to hold PSB equity, appoint BBB as its board and leave it to appoint PSB boards, while also changing the law to give the RBI the same regulatory powers over PSBs as it has over private banks. It should appoint board members — people of proven integrity and competence — of each and every public sector bank. This will cut out political and bureaucratic meddling in appointments. The holding company structure will also strengthen both functional and operational autonomy, even while the government retains a majority stake in the equity of the holding company. Reportedly, the BBB has recommended de-linking compensation of bankers from those of civil servants.
This makes eminent sense. The remuneration structure of senior bankers must be performance-linked, and comparable to what private sector counterparts earn. Pay should be multi-tiered, a reasonable base salary made attractive by variable chunks linked to bank performance over time, the variable bonuses being subject to clawback. This would incentivise them to take commercial decisions and function independently. Such reform calls for overhaul of public sector banks beyond listening to the wise men of the BBB.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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via Banks Board Bureau has role with a holding company