The Reserve Bank of India ( RBI) governor Duvvuri Subbarao on Tuesday pitched for higher compensation for public sector bank ( PSB) employees, for they have to compete with private sector banks on a level- playing field.
"If public sector banks are required to compete with private banks on a level playing field, there is a good case for compensating them too on a competitive base," Subbarao said at the banking conference organised by Federation of Indian Chambers of Commerce and Industry ( Ficci) and Indian Bankers Association ( IBA).
"There is also the risk that if the PSB compensation is not improved, the public sector may lose talent to the private sector," the governor warned.
While discussing the regulation of compensation practices of banks as proposed by the Basel Committee on Banking Supervision ( BCBS), Subbarao said that the Basel regulations under consideration now would be applicable only to 30 per cent of the industry segment constituting only non- PSBs.
PSBs, where compensation is determined by the Central government and where the variable component is very limited, account for about 70 per cent of India's banking sector.
In evaluating Basel- III proposals ( new norms for improving the regulatory oversight on banks across the world) in respect of Indian banks, RBI had historically ensured that the compensation is not excessive, is consistent with industry norms, is aligned with the size of the bank's business and that the variable pay component is limited. However, in respect of foreign banks, it has largely gone by the recommendations of the bank's head office.
However, compared to the illconceived global practices, PSBs' compensation system was lopsided.
" The executive compensation in the public sector, as is well known, is lower than that in the private sector. Notwithstanding the historical reasons for this, there is perhaps a good reason to revisit this," the governor said.
Referring to the draft guidelines on ' Compensation of Whole PSU banks account for 70% of India's banking sector Time Directors/ Chief Executive Officers / Risk Takers and Control Staff' issued in July 2010 inviting public comments, the governor said that their intent was to encourage banks to ensure effective governance of compensation, align the compensation with prudent risk taking, improve supervisory oversight of compensation and facilitate constructive engagement by all stakeholders.
Subbarao said that Indian banks were unlikely to be significantly affected by Basel- III norms, which are set to ask banks to add more capital and liquidity. " We do not expect our banking system to be significantly stretched in meeting the proposed new capital rules both in terms of the overall capital requirement and the quality of capital," he added.
As on June 30, 2010, total capital to risk- weighted assets ratio ( CRAR) of Indian banks stood at 13.4 per cent of which Tier- I ( base) capital constituted 9.3 per cent. " Although the Basel- III norms are yet to be calibrated, it is unlikely that they will be higher than the above figures," he said.