Nepali Times
Strictly Business
If the cap fits


Two weeks ago, this column argued that the central bank had no business capping the salaries and benefits of CEOs of private commercial banks. Today, it will explain what Nepal Rastra Bank can do to use market forces to influence the size of CEO salaries.

Specifically, the central bank should take a broad view of the talent pool that is potentially available to run the growing number of Nepali commercial banks. This means being open to bank boards hiring competent CEOs from outside Nepal as well as from outside the incestuous milieu of the Nepali commercial banking sector.

Doing so has become a matter of urgency. If the collective achievement of the banking sector in 73 years (from the founding year of Nepal Bank Ltd) is that three out of every four Nepalis are yet to be served today, surely banking is one service industry that cannot continue to afford to wrap itself in a mantle of inward-looking inscrutability and high priesthood into which others are not allowed.

Four years ago, the central bank promulgated rules that basically said one could not be a bank's CEO without a minimum of five years of experience in the finance sector. On the face of it, this sounds like a sensible provision. But over the years, with the rise in the number of banks and a corresponding shortage of competent manpower, this provision has had three unintended consequences.

First, it has forced bank boards to recruit their CEOs and top managers from a very narrow talent pool. To a degree, this explains the sort of bank-hopping that we see among bankers today.

Second, enjoying a low-supply and high-demand situation, those bankers and their erstwhile juniors, all now deemed to be top management candidates, have been free to drive hard bargains for high salaries for themselves and their teams.

And third, with salaries inevitably shooting to eye-popping levels, the central bank, citing equity concerns, is now belatedly trying to cap them.

Summing up, what we have is a situation in which the central bank, having unwittingly helped to create a 'bank CEO bubble' through rules that promoted the sort of professionalism more suited to a clubhouse than a competitive industry, is now trying to burst it in a ham-fisted manner. Surely, the central bank knows that bankers are smart enough to figure out ways around any salary cap?

One issue that does not get discussed is that commercial banking, at its core, is not rocket science. After all, how many years of plain-vanilla Nepali banking experiences do you really need to be able to collect deposits at x per cent interest rate and lend them out at a higher rate?

But talk to some bankers, and you'd think that what they do is something closer to quantum physics, and that outsiders have neither the intelligence nor the diligence to be as good as or better than them. That is simply shorthand for keeping the clubhouse the way it is.

It is this sort of insular, arrogant bubble that the central bank needs to burst first by letting boards consider hiring CEOs from outside the industry and from outside of Nepal. That freedom to expand the talent pool alone will start exerting a downward pressure on CEO salaries as more and more candidates, from various industries, start competing for top jobs.

In the process, who knows, many more banks may discover undervalued 'human stock', which, once hired and given top responsibilities, may end up outperforming even the most experienced names, especially when it comes to addressing the central bank's central concern: how to reach those with no access to banking services.

The centre cannot hold, PUBLISHER'S NOTE
Nitty-gritty politicking, PRASHANT JHA
Meddling in the media, CK LAL
Singing of sorrow, INDU NEPAL

1. krishna
you left out the most important thing a bank CEO actually does. Collude with the board to be paid 100's of times what the average employee makes and guarantee yourself a huge golden parachute should you fail. 

(11 JAN 2013 - 17 JAN 2013)