Have greater competition among PSU banks: Rajan

Favouring greater competition among banks, RBI Governor Raghuram Rajan today said government should decentralise decision making in public sector banks (PSBs) after professionalising their boards.

"More decisions need to be decentralised from the government to the PSB boards, once they have been fully professionalised," he said while delivering C D Deshmukh Lecture here.

"For instance, should boards not determine strategy as well as the appointment or renewal of their chief executive? What about their executive directors? Can bank boards have more freedom in choosing these? "Can boards be given the freedom to set compensation structures and performance measures for their senior executives, including long term stock options?," he said.

Decentralisation in decision making will help boards more freedom to differentiate their banks.

"If we want to address the concern that many public sector banks have identical strategies and are competing for the same pie, we have to allow the boards more freedom to differentiate their banks," he said.

Rajan also stressed that PSBs will require more professional boards that can chart a differentiated strategy for them.

"The Bank Board Bureau, which will select board members, will come into operation soon. We have to pay board members of PSBs a market compensation if we are to attract decent talent -- otherwise we risk attracting an unwieldy mix of the truly patriotic and the truly unscrupulous, with the latter intending to profit by their board position," he said.

He questioned the fact that when a bad decision by the board could result in loss of thousands of crores then is it not legitimate to ensure talent on the board.

"When thousands of crores can be diverted by a bad board decision, should we not ensure we have adequate integrity and talent on bank boards?," he said.

Rajan said that competition will help in sustained growth and foster financial inclusion.

"In order to get sustained growth, we need more competition, especially from new entrants who are in a better position to reach hitherto excluded parts of our economy," he said.

After over a decade of no new entry, he said, the country has seen two new private banks enter last year, and a number of payment banks and small finance banks will enter this year.

"We will put licensing for universal banks on tap soon," he said.

Incumbents have expressed fears about unfair competition.

Competition is only unfair if it is not on the same playing field, he said."In fact, new entrants have no privileges that incumbents do not already enjoy. We hope, though, that the new entrants will find innovative ways of giving customers better services at lower prices, thus shaking up and changing the banking sector for the better," Rajan said. Payments bank, post offices or business correspondents could be the means by which the remote villager traverses the last mile to the formal financial system.Small finance banks could be the low cost assessment and monitoring mechanism to lower lending costs to small urban and rural firms, he said. Clearly, he added, PSBs with their large branch network will have to adapt because some of these new entrants will go after their customers. "This is no bad thing because, hitherto, those customers have had limited choice. PSBs will need to automate more so as to reduce transactions costs, cut administrative overheads and improve response times, even while improving their risk assessment and monitoring systems so that they can use the wealth of information they have gathered over the years to make sound lending decisions," he said. Almost surely, this transformation will require more lateral hires at market wages, including skilled loan officers, risk managers, forensic accountants, lawyers as well as IT and human resource professionals, he said. While PSBs can undertake contractual hiring at market wages, it remains to be seen whether they can attract professionals without promising them the means for career advancement within the bank, he added. While Rajan assured that enough capital is available for public sector banks, he cautioned that some of the banks may witness erosion of profitability in the short run due to cleaning of books. "We believe enough capital is available. While the profitability of some banks may be impaired in the short run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way," he said. The Finance Minister, he said, has indicated he will support the public sector banks with capital infusions as needed. "Our estimate is that the support that has been indicated will suffice, especially when coupled with other capital sources that are usually available to banks. Our various scenarios also show private sector banks will not want for regulatory capital as a result of this exercise," he said. The government last year announced a revamp plan, 'Indradhanush', to infuse Rs 70,000 crore in state-owned banks over four years, while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirements in line with global risk norms Basel III. As per the capital infusion road map, PSU banks will get Rs 25,000 crore this fiscal and as well as the next fiscal and Rs 10,000 crore each in 2017-18 and 2018-19. Out of Rs 25,000 crore set for the current fiscal, the government has infused about Rs 20,088 crore in 13 public sector banks.