Banking on tenure

Longer terms for PSB chiefs address the talent gap partly

The government’s decision to increase the term of managing directors (MDs) and chief executive officers (CEOs), and also whole-time directors of public-sector banks (PSBs) from five to 10 years, subject to a retirement age of 60 years, is a sensible move that is likely to play some part in retaining talent at a time when they have been haemorrhaging talent to private-sector rivals. The gazette notification does not, however, offer an unreserved extension to PSB chiefs and whole-time directors. It states that the appointment will be for five years initially and terms can be extended for another five, suggesting that PSB chiefs continue to hold office at the pleasure of the government. All the same, the prospect of a longer tenure offers PSB heads greater room for strategic manoeuvre than a five-year stint, of which the first year and a half alone is often spent learning the ropes of the new responsibilities. 

But against the bigger picture, this demi-extension of CEO and MD terms can only partly address the talent problem in PSBs for several reasons. For one, they continue to operate under the constraints of government ownership in dictating lending decisions. Though the incidence of “telephone banking” appears to have waned, it remains a significant issue in the public-sector banking system, unlike private-sector banks. For another, the disparities between PSB remuneration and those of the private sector remain so wide as to neutralise the lure of longer tenures. The country’s highest-paid private-sector CEO earns 35 times more than the highest-paid PSB chief; the gulf narrows only slightly if housing and other perks are included. In 2020, when some private-sector banks instituted pay cuts in response to the Covid-19 lockdown, one PSB chief had joked that he would have to live on the streets if salary reduction was implemented for his bank. Wide pay disparities exist down the line as well, which partly explains why PSBs have struggled to fill the gaps left by retiring staffers even as private-sector banks have seen their staff strength double over the past 10 years or so.

Finally, a potential 10-year tenure and 60-year retirement age, though unexceptionable, represent a sharp degree of asymmetry with private-sector competitors. In 2021, the Reserve Bank of India’s instructions on governance in private banks, small finance banks, and wholly owned subsidiaries of foreign banks stipulated that MDs and CEOs, and whole-time directors could continue in their posts for 15 years within the overall age limit of 70 years. Given this, it is unclear why PSB chiefs and whole-time directors should have a relatively short tenure and retirement age. That too at a time when the PSBs’ share in commercial credit fell from 74.2 per cent 10 years ago to 54.8 per cent in March 2022. In contrast, the share of the private-sector banks nearly doubled to 36.9 per cent in the same period. Levelling the playing field for talent between the state-owned and private banks, therefore, may require more than a tenure extension, though it must count as a good first step.