India’s state banks underpay, says official

India’s central bank governor urged the government to revise the pay of executives in state-controlled banks, a call in stark contrast with the finance and corporate affairs ministry’s proposal to cap salaries.

Duvvuri Subbarao, governor of the Reserve Bank of India, warned that India’s public-sector banks, which make up about 70 per cent of the entire industry, risked losing competitiveness and talent if they refused to increase wages.

“The executive compensation in the public sector is lower than the private sector. Notwithstanding the historical reasons for this there is perhaps a good reason to revisit this,” Mr Subbarao said at a bankers’ conference in Mumbai. “If public-sector banks are required to compete with private banks on a level playing field there is good case for compensating them on a competitive base. There is also the risk that if public-sector banks’ compensation is not improved, the public sector may lose talent to the private sector,” Mr Subbarao added.

The debate over executive pay has been at the heart of the so-called Basel III global regulatory overhaul that followed the credit crisis and that has put under scrutiny remuneration mechanisms that encouraged risk-taking.

Bankers’ pay and bonuses in the aftermath of the crisis triggered a political firestorm in the US and Europe as the institutions that emerged from the crash began reporting big profits in an apparent return to “business as usual”.

However, the debate in India is significantly different as bankers’ salaries are low compared with those in developed markets.

Executives of state-controlled banks get salary packages that are lower than those of their private-sector counterparts. Chanda Kochhar, head of ICICI Bank, the country’s largest private-sector bank, received a remuneration of about Rs17.5m ($375,000) in the year ending in March 2010, more than six times the Rs2.65m netted by OP Bhatt, chairman of State Bank of India, the nation’s biggest state-run bank.

Compensation packages for public-sector bankers are set by the government, while pay for executives working in private-sector banks is set semi-autonomously – clearance is obtained from the RBI.

“A pay rise would be very much welcomed in the public sector, but it will take time for this to happen,” said TM Bhasin, chairman and managing director of state-owned Indian Bank.

The chairman of SBI warned that the nation’s double-digit and inclusive growth ambitions risked being quashed by a lack of skills in the banking sector.

“That is the major challenge that we have; it’s a huge challenge,” said Mr Bhatt.

“I think it is a necessary challenge because if we do not meet this challenge [this entire] growth story that we are talking about may stop.”