RBI’s overreach

   By Ravi Shanker Kapoor ,  08-Mar-2019
RBI’s overreach

The banking regulator’s proposal to regulate the remuneration of top officials is ill-advised

The Reserve Bank of India’s (RBI’s) proposal to regulate the salaries of top officials of private and foreign banks is regressive in the extreme. It is a throwback to the pre-reforms era in which the authorities decided everything, from which industries to be set up to the public issues to be allowed. Remuneration of top executives in the corporate sector was also regulated.

Six years ago, the central bank started controlling the compensations for chief executive officers (CEOs) and whole-time directors of private banks, including foreign banks. The RBI intends to further tighten the rules governing their remuneration. In a discussion paper, it has suggested that a larger proportion of their compensation should come in the form of variable pay. It wants that portion to be at least 50 per cent of the total package.

Further, the RBI wants employee stock options or Esops to be included as part of variable pay. It also wants the variable pay not to exceed 200 per cent of fixed pay. The recommendations also pertain to proportion of the non-cash component and guaranteed bonuses which the RBI wants to be scrapped. It also favors penalties in case of divergence in non-performing assets and provisioning beyond the RBI prescribed threshold for public disclosure.

“Members of staff engaged in financial and risk control should be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the bank. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial and risk management’s influence on incentive compensation,” said the RBI.

The central bank has blockquoted the 2008 global financial meltdown for its undue interference in the working of private and foreign banks. “The compensation practices, especially of large financial institutions, were one of the important factors which contributed to the global financial crisis in 2008. Employees were too often rewarded for increasing the short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organizations. These perverse incentives amplified the excessive risk taking that severely threatened the global financial system. The compensation issue has, therefore, been at the centre-stage of the regulatory reforms,” the RBI noted.

This is clearly a case of overreach on the part of the central bank. In carrying out its regulatory responsibility, it has not been the paragon of competence. Nirav Modi kept robbing the Punjab National Bank for seven to eight years, but neither the central bank nor anybody else knew about the robbery that runs into billions of dollars.

LIC took over the sick IDBI Bank in violation of norms, and yet the banking regulator didn’t do anything. It didn’t do the things it was supposed to do—set in place robust anti-fraud systems and uphold norms. And it wants to do what it shouldn’t be doing—regulating remuneration of the banking top brass.