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Improve pay at public sector banks: Subbarao


Mumbai : India’s central bank governor Tuesday said pay packages at state-run banks need to be revamped and brought at par with their private sector peers if they are to retain talent.

“If public sector banks are required to compete with private banks on a level playing field, there is a good case for compensating them too,” Reserve Bank of India Governor D. Subbarao said, delivering a lecture at a FICCI-Indian Bank Association seminar here.

“There is also the risk that if the public sector bank compensation is not improved, the public sector may lose talent to the private sector,” said Subbarao.

However, criticising the huge payouts to global bank executives, Subbarao said: “The compensation framework overlooked the perverse incentives it would engender. Bank executives focused too much on short-term profits and compromised long term interests with disastrous consequences.”

According to some analysts, the massive compensation, especially high variable pays, had resulted in the engineering of derivative products and their mid-selling which culminated in the financial crisis in 2008.

During his speech, Subbarao also said Indian banks would be able to comply with the capital adequacy norms proposed in the Basel-III norms.

“As on June 30, 2010, the aggregate capital to risk weighted assets ratio of the Indian banking system stood at 13.4 percent. Although the Basel III norms are yet to be calibrated, it is unlikely that they will be higher than the above figures.”