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Most under rated risk to Indian banks
Wed, 8 Jun Pre-Open

If the 3 - 6 - 3 rule of banking would indeed be true, probably this crisis would not have hit Indian banks and we wouldn't have discussed it at length. The 3-6-3 rule describes how bankers would give 3% interest on depositors' accounts, lend the depositors money at 6% interest and then be off to playing golf at 3 pm. This alludes to how a bank's only form of business was lending out money at a higher rate than what it is paying out to its depositors. Does this require any talent? Most readers would reply in the negative. But in reality banks do more than plain vanilla lending and borrowing in recent times. That too amidst stiff competition. Hence acquisition and retention of talent is a major challenge for entities looking at growing its loan and deposit book or non fund businesses.

Gone are the days when borrowers and depositors approached banks for loans and deposits. More than 70% of loans and deposits today are 'sold' by banks and financial institutions. Managing the fund flows at a profitable rate therefore requires a growing and talented workforce. Any shortage of the same could be a critical hurdle to the sector's growth even if the savings and investment rate in the country remain amongst the best.

Close to 15% employees of public sector banks in India (over a lac employees) will be retiring by 2015. At least a fifth of them will be from senior and very senior positions like that of the CMD. The problem for now is restricted to the PSU entities given the higher average employee age versus private sector players. However, given that the PSU's control 70% of banking assets in India the problem is indeed not negligible.

Lateral hiring - only for IT majors?

Indian IT majors have been into lateral hiring since several years as the scope and complexity of their businesses have improved. This has paid off well for them given their pricing power against customers. Will that model suit Indian banks as well?

Currently in the PSU banks, talent acquisition at the junior level is only a small part of the overall crunch. Hiring people for senior positions will come at a heavy cost for the entities unless planned well in advance. Inability to pick leaders from within the organization will force the PSUs to hunt for talent from their private and foreign banking peers. However, the candidate may not turn out to be a good fit given the PSU's socialist approach to business. Two, the performance linked incentives may not work well with the limited pricing power and profitability that the PSUs have.

Will the entities stay profitable?

We believe that the government has to do more than infusing capital into PSU banks to ensure their growth. It is time the government gives them some degree of autonomy as well. This will help the entities customize their employee base and performance payments as per their specific requirements. Not only will this solve the problem of talent crunch but also ensure adequate growth, profitability and shareholder returns from these entities.

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