Banks need reform, not exhortations–Economic Times

The right incentives and the right institutional framework, complete with rigorous governance norms, are what bankers need to lend to deserving borrowers without reservation, not exhortations by either the interim finance minister or the RBI governor. Any credit decision involves judgment of risk. Not all wrong calls are malafide.

Nevertheless, bankers worry that enforcement agencies would come calling on them even when there is no malfeasance. At a performance review of state-owned banks, finance minister Piyush Goyal sought to assuage the morale of bank chiefs, saying the government would protect genuine commercial decisions. But who would decide whether a decision was genuine or not? Is the reassurance temporary or contingent? Such questions should be made redundant by reforming the ownership structure of banking, banking governance and the incentive structure of bankers.

The government should vest bank ownership in a holding company whose board should appoint boards of individual banks. The holding company can leverage its capital to inject capital in banks, and shield banks from politicians and bureaucrats who meddle with decision making.

It can institute a remuneration structure that rewards the performance of bankers, aligning it with the performance over time of assets that they originate. The largest chunk of their total remuneration must be a long-term variable pay linked to the performance of bank stocks to promote the culture of maximising returns. That is the global norm including in investment banks that offer hefty incentives to get the best talent.

The profitability of state-owned banks will improve when they step up MSME loans. MSMEs would then not have to turn to assorted non-banking finance companies and informal lenders for their needs. Banks need to get the expertise to assess MSME loan viability. They need to hire more people, acquire new skills and invest in IT and data mining. Institutional and governance reforms, besides capital infusion, should be the government’s focus.

via Banks need reform, not exhortations

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