Raghuram Rajan calls for revamp of bank regulators - NEWS SENTRY

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Tuesday, 16 August 2016

Raghuram Rajan calls for revamp of bank regulators

The Reserve Bank of India (RBI) and the government should reduce the differences in regulatory treatment between public sector banks and private sector banks over the medium term, central bank governor Raghuram Rajan said on Tuesday.

“Authorities should ensure their actions are institution, ownership, and technology neutral so as to ensure that the most efficient customer-oriented solutions emerge through competition,” he said speaking at a banking conclave organised by the Federation of Indian Chambers of Commerce and Industry (Ficci) and Indian Banks’ Association (IBA).

If, however, authorities deliberately skew the playing field, competition may not be efficient he said, pointing to the example of state-owned banks.

Apart from meeting all the regulatory requirements (like private banks do), public sector banks also have to follow government diktats such as opening Prime Minister Jan Dhan Yojana account and make MUDRA loans. They also have to follow inflexible rules on hiring which require them to recruit only through all-India exams.

File photo. Raghuram Rajan said some of the differences between public sector banks and private banks can be mitigated if the government pays an adequate price for mandates. Photo: Bloomberg

In part compensation, public sector banks do get more government deposits and business, and are backed by the full faith and credit of the government, he said. While it is unclear whether the cost of the mandates outweigh the benefits, they do skew the competitive landscape, he added.

“Some of the differences between public sector banks and private banks can be mitigated if the government pays an adequate price for mandates,” Rajan said.

To reduce the variation in regulations for public sector and private sector banks, the RBI has been consistently bringing down statutory liquidity ratio holding requirements, and allowed over half of these holdings to meet the Basel-mandated liquidity coverage ratio.

An internal RBI committee is studying what a branch truly means and how it can serve the most number of people in the least expensive structure, he said.

As competition increases, however, the authorities should ask how long mandates should continue, and keep targeting them better towards the truly underserved. They should also withdraw any preferential treatment, to the extent feasible, at a commensurate pace, he added.

In a highly-competitive environment that is emerging in the banking sector, public sector banks also have to deal with some inherent struggles that are built in the way they are structured. While bad loan management is something that Rajan describes as the most pressing task, equally important is governance and acquisition of talent with expertise in project evaluation, risk management and IT including cyber security, he said.

Rajan pointed out that even though the bank board bureau (BBB) has taken over the appointment process in banks, the final decisions are still being taken by the Cabinet’s appointments committee. Appointments of non-official directors on bank boards still lie outside the BBB. As the BBB gains experience, it would make sense to allow these decisions also to be taken by it, Rajan said.

Similarly, public sector banks are also struggling with thinning middle management ranks due to retirements and low pay grades among top employees, which leads to them not being able to attract the top crop of managers. Rather than seeing these as challenges, Rajan said, public sector banks must consider promoting talented youngsters and provide them with necessary training.

An increased emphasis on performance evaluation, including identifying low performers with the intent of helping them improve, may be warranted. In addition, rewards like Employee Stock Ownership Plans (ESOPs) that give all employees a stake in the future of the bank may be helpful. With PSB shares trading at such low levels, a small allocation to employees today may be a strong source of motivation, and can be a large source of wealth as performance improves, he said.

Banks must also focus on hiring more local talent at their local branches since these employees come up with an inherent understanding and information about the area and relationships which are already built out.

Moreover, banks will also be able to pay wages depending on the areas that they service.

There is a situation of overlap of many authorities governing public sector banks right now, Rajan said. With the government’s department of financial services, the parliament, the regulator and the vigilance commission all monitoring their activities.

Going ahead, much of the governance would have to move to the boards of the individual banks, rather than with multiple authorities, Rajan said.

He also said RBI would perform a purely regulatory role, and withdraw its representatives on bank boards—this will require legislative change.

Over time, RBI should also empower boards more, for instance offering broad guidelines on compensation to boards but not requiring every top compensation package be approved.

“Given strong oversight from the bank’s board, the CVC and CAG would get involved only in extraordinary situations where there is evidence of malfeasance, and not when legitimate business judgment has gone wrong,” Rajan said.

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