Opinion | Longer tenures for CEOs a booster for state-run banks but more needs to be done

A State Bank of India ATM in Mumbai (File photo)

The government said in a notification on November 17 that the term of wholetime directors, including managing directors, of state-owned banks has been doubled to 10 years, subject to retirement at the age of 60.

Until now, wholetime directors, including MDs, were appointed for five years. With the rule change, public-sector bank directors and MDs will be appointed for five years initially and their terms can be extended for an additional five years, the government said.

The move has big positive implications for state-run banks, which have been struggling to retain top-level talent beyond the initial few years, putting them behind tougher rivals in the private sector.

This was the problem: a newly appointed CEO typically takes one year to clean up the predecessor’s issues and then two to three years to bring in efficiency and operational improvements in his own way. By the time the CEO settles down, his tenure gets over, creating continuity problems.

Management continuity

Over the years, this created a disadvantage for public-sector banks competing with private-sector rivals that are typically led by CEOs for a decade. Now, state-run lenders can retain young wholetime directors for CEO posts and create management continuity for 10 years.

Secondly, a longer tenure for CEOs ensures more accountability in lending decisions. Many times, the CEOs of public-sector banks do not focus enough on the quality of loan books and instead embark on a volume game to show faster business growth in a bid to please the top bosses in New Delhi.

To show a cleaner balance sheet, the recognition of bad assets is typically pushed to the end of their term, leaving their successors to wrestle with the bad loan accounts. This is why when a new CEO takes charge, a mandatory clean-up is the first priority of the top job. With longer tenures, CEOs will have to focus on the quality of the book, not just volumes.

Finally, continuity at the top will help public-sector banks be better prepared to take on increasing competition from private rivals with a long-term focus. While state-owned banks have restrictions in a range of aspects vis-à-vis private rivals, they are still expected to perform at an equal pace or even better than the competition. Longer tenures for CEOs will be a positive in this context.

But, that’s not enough. While the issue of shorter tenures has been sorted, the government now needs to urgently address the compensation disparity between CEOs in public and private sector banks.

Private sector bank CEOs typically earn around 10 times – or even more – what top executives at public sector banks are paid. And this when they need to show operational efficiency and aggressiveness with rivals.

The pay disparity creates a disadvantage and can demoralise poorly paid sarkari bank CEOs. As the next step, the government must bring in a better approach to address the compensation disparity issue, at least at the top levels.