Suggesting a major reduction in government and regulatory oversight of public sector banks (PSBs), including by RBI itself, the outgoing Governor also proposed withdrawing the central bank nominees from their boards.
"Today, a variety of authorities -- Parliament, the Department of Financial Services, the Bank Board Bureau, the board of the bank, the vigilance authorities, and of course various regulators and supervisors including the RBI -- monitor the performance of the public sector banks.
Rajan also stressed on the need to streamline and reduce the overlaps between the jurisdictions of the authorities, while specifying "clear triggers or situations" where one authority's oversight is invoked.
He said agencies like, CAG and CVC, should get involved only in extraordinary situations where there is evidence of malfeasance, and not when legitimate business judgment has gone wrong.
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Rajan, who has often been seen during his three-year tenure as central bank governor ending next month, as being on the opposite side of debate vis-a-vis the government on various issues, said these suggestions should be viewed as opening a discussion rather than formal views of RBI.
On RBI, he said, it would perform a purely regulatory role and withdraw its representatives on bank boards, while adding this will require legislative change.
"Over time, RBI should also empower boards more, for instance, offering broad guidelines on compensation to boards but not requiring every top compensation package be approved," he said.
In the interim, till the bank boards are professionalised, he favoured the mandate for this to be vested with the fledgling Bank Board Bureau (BBB) so that it can help improve the governance and management structures at the public sector banks by allowing it to fully handle the appointments.
"Over time, as the bank boards are professionalised,
executive appointment decisions should devolve from the BBB to the boards themselves, while the BBB, as it transforms into the Bank Investment Company (BIC), which is the custodian for the government's stake in banks, should focus only on appointing directors to represent the government stake on the bank boards," the Governor said.
Addressing bankers at the annual Fibac, he went on to add that "it is important that bank boards be freed to determine their strategies. Too much coaching by central authorities will lead to a sameness in public sector banks."
The central bank chief said lateral hires are also important, but many banks as well as public institutions have strong aversion to lateral hires because they break the cadres, and noted that one of the difficulties public sector banks have is the court judgements that prohibit hiring from specific campuses.
The Governor further said there is a need to be more liberal in allowing local hires. There are many places in the country where people may find it difficult to go, but local talent is available and can do a fantastic job.
The Governor also called for levelling huge imbalances in payscale of public sector bankers saying that their top management should be paid higher instead of the present state of overpaying the bottom and underpaying the top which makes it difficult for them to attract talent at the higher level, specially through lateral hiring.
"One of the problems, of course, is that as with all public sector entities, you overpay at the bottom, and underpay at the top. Compensatory, the difference is that, yes, you feel that you are doing the job for the broader public but you just make it harder to attract top talent, specially a lateral entry," Rajan said.
"As the BBB gains experience, it would make sense to allow these decisions also to be taken by it," Rajan said.
He also called for ending the differentiated treatment that public sector banks enjoy from both the government and the regulator.
"Authorities like the central bank and the government should, over the medium term, reduce the differences in regulatory treatment between public sector banks and private sector banks, and more generally, between banks and other financial institutions.
Similar method could be adopted at agri lending too, he said as banks are finding ways to make MSME loans more remunerative by decreasing transaction costs and similar techniques could be brought to agricultural loans, specially as farm productivity increases.
"Wider use of credit information bureaus and collateral registries should also help improve credit evaluation and lower the cost of repossession. This should make it easier to meet priority sector norms.