Two weeks ago, Nepal Rastra Bank sent a letter to the commercial banks. It asked the bankers to consider whether there could be provisions for creating smaller gaps between the range of perks and benefits enjoyed by the top bankers and those at the lower end of the hierarchy.
Seeing this as an instance of unwarranted meddling, the bankers responded last Tuesday. Nepal Bankers' Association (NBA), normally a diffident body, sent out a letter basically arguing that as per Nepali laws, the task of determining a bank executive's salary, perks and benefits is something that's best left to the judgment and discretion of her bank's board of directors.
In both a free market and legal sense, the bankers are correct. The job of the Central Bank is to be an umpire that enforces the rules of the game and punishes violators. Its job is not to tell players when, how and which foot they should move in the game. Doing so diminishes its importance, and gets it bogged down in minutiae.
Still, it's arguable that there is a range of wider contextual issues that any banker should consider when thinking about salaries, perks and benefits in the industry.
Friendly boards: Though the Central Bank should be applauded for strengthening the corporate governance of banks, much work remains to be done. At some banks, certain individuals are still both the chairman of the board and the CEO of the company. This arrangement might have served its purpose in earlier times when the banking sector was in its infancy.
In these days of competition and scrutiny, the arrangement simply strikes investors as a hassle-free way for the chairman to reward himself with other people's money. Besides, this also makes it easier for the chairman to stuff the board with his buddies so that all decisions, often made during family BBQs, go as per the chairman/CEO's wishes. Given the reality of these and other widespread questionable corporate governance practices, it takes a bit of chutzpah for some banks to present their boards' decisions as something that's kosher.
The issue of optics: The Nepali media never tires of reporting bankers' jaw-dropping monthly salaries, which range from Rs 500,000 to Rs 1.4 million Ė the latter being comparable to what commercial bankers in major finance centres around the world earn. Put this in the context of the world's 16th poorest country, which has a high rate of unemployment and a very-sympathetic-to-the-Left population, and the optics do not come out well.
The point here is not that the bankers shouldn't be paid highly. It is that given the broader societal context, which envelops all that we do in Nepal, bankers should not complain when non-bankers are bitter about banking salaries. It's no surprise that they want somebody somewhere to do something to tighten the reins. A wise banker would recognise these broader societal trends, and find ways to mitigate the risks they pose Ė perhaps by ramping up credible CSR activities and by recasting their institutions as trustworthy servants of other people's money.
Moreover, given that bankers always complain of losing their good people to other banks all the time and that there's a severe shortage of people at the lower end, it's not a bad idea to re-examine HR policies, especially salary levels, perks and benefits, and see whether some parity could be achieved to retain high performers.
Viewed this way, the Central Bank's letter, though wrong in its intent, could serve as a wake-up call to the banks.