The Reserve Bank of India (RBI) governor, Raghuram G Rajan, has suggested Indian banks should improve their hiring process to bring in the right talent and also offer performance-based incentives, including promotions and employee stock options, to its executives to improve the performance of its loan assets.
“The current times are interesting, profitable, and challenging for the financial sector. Interesting because the level of competition is going to increase manifold, both for customers as well as for talent, transforming even the sleepiest areas in financial services; profitable because new technologies, information, and new techniques will open up vastly new business opportunities and customers; and challenging because competition and novelty constitute a particularly volatile mix in terms of risk,” Rajan was quoted as saying at FICCI-IBA Annual Global Banking Conference held in Mumbai on 16 August 2016 in an official press statement by the RBI.
The RBI governor hoped that banks will not be irrationally exuberant in lending when enormous project financing will be required in the coming days. He stressed that the lenders should focus on improving the efficiency of stressed assets, and creating the right capital structure so that all stakeholders could benefit. The RBI governor recommended that banks should be more creative when searching for new management teams, including the possible use of public sector firms or private sector agents, and also provide well-structured performance incentives to its executives such as bonuses for meeting targets for cash flow/profitability and stock options. Bankers should be given incentives for performance of the loans so that they structure and monitor loans carefully.
Banks should bring in more in-house expertise to project evaluation, including understanding demand projections for the project’s output, likely competition, and the expertise and reliability of the promoter to improve the quality of their loan assets. The governor recommended mitigating risks where possible, and sharing of risk between the promoter and financiers, or a transparent arbitration system incorporated where risk factors cannot be mitigated.
“Solutions like increased emphasis on performance evaluation, including identifying low performers with the intent of helping them improve, rewards like Employee Stock Ownership Plans (ESOPs) that give all employees a stake in the future of the bank might also be helpful. “None of these changes are easy, but they are also not impossible,” he emphasised.
Lenders were also advised to incorporate real-time monitoring of costs through information technology. “It only required a stronger marriage between information technology and financial engineering with an important role for practical industry knowledge and incentive design,” he said.
The RBI governor also recommended banks to strengthen their mid-level management, which has thinned out by retirements. Rajan suggested that banks should persuade courts to allow some campus hiring and simplify bank entrance exams, including use of online entrance exams. He also suggested that banks should have more freedom to hire locally, and pay wages commensurate with the local labour market.