Performance will decide compensation for bankers, says RBI

Compensation of bankers will soon be based on the performance of their banks, according to the Reserve Bank of India (RBI).

In the revised prompt corrective action (PCA) norms proposed by the central bank last week, banks which do not meet financial parameters set by the RBI, would face restrictions on compensations for directors and management including the chief executive officers and executive directors.

The restriction on compensation has been recommended as one of the mandatory actions by RBI towards banks that breach the third-level risk threshold when it comes to either capital, bad loans or profitability.

The third-level threshold includes capital that is below the indicator by 3.625 percent, net non-performing loans above 12 percent and negative return on assets (ROA) for four consecutive years.

Current minimum prescription to maintain capital is 10.25 percent with 9 percent minimum total capital plus 1.25 percent counter cyclical buffer.

The PCA framework, RBI said, would apply without exception to all banks operating in India including small banks and foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

Encumbered with the heavy bad loans in their books and slower loan growth, many banks are struggling to find profitability and raise capital.

However, this may put a pause on a Bank Board Bureau's proposal to government to ensure pay parity between public and private sector banks’ management in order to attract high quality and talented professionals.

CEO compensation has been a key issue with PSBs as there is huge discrepancy with private sector.

As per the latest, SBI Chairman Arundhati Bhattacharya's annual compensation for 2015-16, according to the bank's annual report, was Rs 31.1 lakh (including incentives of Rs 7 lakh and arrears of Rs 3 lakh). This is against Rs 9.73 crore package of Aditya Puri, CEO of HDFC Bank.

Incidentally, HDFC Bank's market capitalisation is the highest, and more than all the nationalised banks put together.

Additionally, PSBs today dominate with an almost 80 percent of market share. And despite wage differences, PSBs have a higher wage cost than those in the private sector because of mandatory obligations of rural and social infrastructure banking support required by PSBs from its owners, which is the government.