Selecting bank chiefs

The finance ministry has finalised a new round of senior public sector bank appointments, following its established procedures. But it is time to do things differently.

In the last few months, several public sector banks have gone in for public issues and there has been a sea change in the valuation of these banks and of those listed earlier.

Thus the public's stake in these banks has gone up significantly, aside of the fact that the public ultimately owns them through the exchequer.

What is more, the new investor interest in public sector shares in general puts a premium on their performance.

If this is not seen to be steadily improving over time, there will be a backlash and valuations will tumble. Thus, the government cannot allow these banks to drift even in the near term, because the signals will be quickly caught by the market.

A combination of policy initiatives, notably by the Reserve Bank of India, and happenstance have led to a rapid improvement in the health of these banks in the last few years.

They are now being seen in a positive light, especially vis-à-vis their counterparts in China. The government must build on this.

To ensure a continuous improvement in the public sector banks' performance, it is time the government changed the way it selects their seniormost functionaries.

On the face of it, the procedure to select a chief executive is unexceptionable. The selection is done by a committee consisting of the RBI governor, the finance and banking secretaries, an academic and a retired senior banker; this committee's choice is then approved by the appointments committee of the Cabinet.

The first change needed is to start advertising these positions. Once that is done, the positions will at least theoretically become open to senior executives in the private sector also.

The new generation private sector banks are at the cutting edge of technology and innovation, and public sector bankers could learn a thing or two from them.

It is also necessary to change the composition of the selection committee so as to tilt the representation a little in favour of private sector experts.

For example, why have a retired public sector banker and not a senior leading light from the private financial sector?

The latest round of top appointments continues the practice of promoting an executive director to the position of chairman-cum-managing director, not of the same bank but of another bank.

As deregulation proceeds apace and there is more genuine competition among the public sector banks, they will develop distinctive identities that will differentiate one bank from another.

This will increase the need for them to develop their own strong management cadres and ethos. A bank with a strong management culture and ethos of its own, like Corporation Bank, should not have to import a chief executive.

Letting banks develop their own management culture and ethos must also lead to freedom for them to rework their risk and reward system.

Changing the way the chief executive is selected has to be accompanied by changing compensation policy to attract the right talent.

The government, of course, has to have one overriding objective in initiating these changes "" prepare the banks for a smooth changeover from government to public ownership.