PSU bank reform: Esop, efficiency focus could be game changers

Experts say Esop facility should be extended to GM, DGMs; Banks could cut balance sheet size to improve efficiency

The finance ministry’s decision to consider employee stock options (Esops) for the top management of public sector banks (PSBs), along with basing a part of capital infusion on efficiency, was likely to lead to improved performance, experts said. Announcing major reform initiatives for PSBs, the finance ministry on Friday adopted a host of measures in line with the P J Nayak committee report on governance of state-owned banks.

The government said it was formulating an Esop policy for the top management of PSBs. At present, the chief executives and executive directors are eligible for bonus, which will be converted into Esops, according to the government’s plan.

“Operating performance will be linked to the performance bonus to be paid to the managing directors (MDs) and chief executive officers (CEOs) of banks. The quantum of performance bonus is also proposed to be revised shortly to make it more attractive. We are also considering Esops for top management of PSBs,” the government said on Friday.

Banking industry experts said if Esops were extended to general managers and deputy general managers, their performance would improve as well.

“This will be a significant development for public sector banks. Banks are poached for talent by other institutions. The difference in compensation between the public and private sector is significant. It is difficult to retain people,” said Harshu Ghate, co-founder and CEO of Esop Direct, a company specialising in equity compensation services.

PSBs are facing a talent crunch following two decades of frozen employment at the mid-management level. The entry of more universal and niche banks is expected to add to pressure on human resources of PSBs.

The finance ministry has proposed a new framework of performance indicators. Twenty-five marks each are allotted to indicators relating to efficiency of capital use and diversification of business and 15 marks each are allotted for specific indicators under the non-performing asset management and financial inclusion. The remaining 20 marks are reserved for measurement of qualitative criteria, including strategic initiatives to improve asset quality, efforts to conserve capital, human resource initiatives, and improvement in external credit rating.

Anandorup Ghose, performance, rewards and talent practice leader at Aon Hewitt India, said Esops at PSBs might face some challenges. “Vesting of these will take at least three to four years, and bank directors move sooner than that. But this could bring a new dimension in PSBs since they have not experimented with this before," he added.

A fifth of the Rs 25,000 crore allocated for capital infusion this year will be based on the performance of the banks during April-December. According to bankers, one option to increase efficiency parameters like return on asset and return on equity is to cut down their balance sheet.

“A large portion of the loans are given to corporate entities at the minimum rate. Banks could think to offloading such loans to other banks to improve their returns,” said a former banker.