Banking on Reforms–Economic Times

By RAGHURAM RAJAN

Risk management still needs substantial improvement in public sector banks, regulatory compliance is inadequate and cyber risk needs greater attention. Interest rate risk management is notable for its absence, which means banks are very dependent on the central bank to smooth the path of long-term interest rates.

These are all symptoms of managerial weakness. There is already a talent deficit in internal public sector bank candidates in coming years because of a hiatus in recruitment in the past.

Outside talent has been brought in very limited ways into top management in public sector banks. This deficiency needs to be addressed urgently by searching more widely for talent. Compensation structures in public sector banks also need rethinking, especially for high-level outside hires.…

Real risks have to be mitigated where possible, and shared where not. In fact, real risk mitigation requires ensuring that key permissions for land acquisition and construction are in place up front, while key inputs and customers are tied up through purchase agreements.

Government will have to deliver what it is responsible for in a timely way.

Where these risks cannot be mitigated, they should be shared contractually between the promoter and financiers, or a transparent arbitration system should be agreed to.

(From “What the Economy Needs Now”)

via Banking on Reforms

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