Performance pact to keep bankers on their toes

Public sector banks view the proposed performance-based memorandum of understanding (MoU) leading to greater autonomy and market-related remuneration.

In the late '80s, the banks used to have a performance-based agreement with the Reserve Bank of India, which was later scrapped in the early '90s. The government now wants to re-introduce the pact given the competitive banking environment.

"The MoU will enhance shareholder value as it will trigger off performance culture within a bank," said A K Khandelwal, chairman and managing director Bank of Baroda. "We could subsequently enter into MoUs with general managers and ensure greater productivity," he added.

This is a step towards granting greater managerial autonomy to banks. Subsequently, this could lead to performance-linked remuneration for executive directors and chairmen, Khandelwal added.

The Indian Bank's Association (IBA), the premier banking body, has for some time been pitching for market-related remuneration for EDs and CMDs.

"The MoU will reduce government interference in the daily working of banks such as appointment of staff, designing new business strategy, opening and closing of branches and other business related decisions," said managing director of a public sector bank.

"As the largest shareholder, government has the right to demand return on equity and performance from banks," he added.

However, the government should consider introduction of market-related remuneration to chairman who meet the set targets for the fiscal, said the MD.

V K Chopra, chairman & managing director, Corporation Bank, said : "Once the MoU is submitted to the ministry, banks will be on their toes since the targets on business growth and other key parameters will be closely monitored by our majority shareholder. We were focused on growth earlier also but this kind of close monitoring will keep us more alert."

"The owner has every right to set out targets but then the other part of rewarding the management with incentives for meeting the targets and disincentives for not meeting them should also be there," said Cherian Varghese, chairman & managing director, Union Bank of India.

There is another school of thought that feels that the MoUs should be made public.

"Why should only one shareholder have privileged information on business targets. In the interest of best corporate governance practices, the target should be made public and it will serve as a guidance. With the practice of guidance the market will reward and punish the banks depending on their performance."

M Balachandran, executive director, Bank of India, "I think the MoU is a very good move. With this kind of monitoring we can ask for a more facilitating environment to achieve our targets (such as Sarfesi Act helped recovery of banks). When banks ask for autonomy there has to be accountability as well."