R Gandhi: Roundtable on capacity building in banks
Speech by Mr R Gandhi, Deputy Governor of the Reserve Bank of India, at the Roundtable
on Capacity Building in Banks, organized by the Centre For Advanced Financial Research
and Learning (CAFRAL), Mumbai, 18 June 2015.
* * *
Speech delivered by Shri R. Gandhi, Deputy Governor Assistance provided by Ms Usha Janakiraman is gratefully
acknowledged.
I appreciate CAFRAL for taking the initiative of holding this roundtable on capacity building in
banks. As I am given to understand, the objective of this roundtable is to discuss the key
aspects of the recommendations of the Committee on Capacity Building in Banks and
NonBank Institutions (Chairman: Shri G. Goplalakrishna) and to formulate strategy to streamline
and implement the recommendations. I also understand that the issues and challenges in
implementing these recommendations would be the major focus area today. At a time when
the Reserve Bank as a regulator is engaged in consultation with the stakeholders on the
aspects of implementation of the various recommendations of the Committee, such an
initiative is most welcome. The feedback from the deliberations today would serve as a good
input for us, going forward as we formulate the policies for implementation.
Capacity Building
2. Let me start by asking a fundamental question to set the tone for the deliberations to
follow. What is "capacity building"? Capacity building is an ongoing process through which
individuals, groups, organizations and societies enhance their ability to identify and meet
development challenges. It also aims at understanding the obstacles that inhibit people and
organizations from realizing their development goals.
3. Capacity Building is much more than training and includes the following:
• Human resource development: the process of equipping individuals with the
understanding, skills and access to information, knowledge and training that enables
them to perform effectively.
• Organizational development: the elaboration of management structures, processes
and procedures, not only within organizations but also the management of
relationships between the different organizations and sectors (public, private and
community).
Institutional and legal framework development: making legal and regulatory changes
•
to enable organizations, institutions and agencies at all levels and in all sectors to
enhance their capacities.
4. A practical definition can be as follows: Capacity Building is planned and continuous
development of (or increase in) knowledge, management, skills, and other capabilities of
persons and organizations through acquisition, guidance, incentives, technology and/or
training.
Capacity Building - an obsession with financial market regulators
5. Capacity Building is an obsession with the financial market regulators in general and
more specifically with the Indian financial market regulators. The Reserve Bank of India,
being the oldest among the financial market regulators has a long history of persisting with
this obsession. Its efforts include establishing and operating or being a catalyst for the
formation of very many capacity building organisations, not just for itself, but also for the
banking and even the financial sectors. These institutions have catered to training, higher
academic research, technology, education and certification, etc needs of the sector. There is
really a very long pedigree of institutions established / catalysed by the Reserve Bank right
from early 1950s. These are the Reserve Bank Staff College, the Bankers Training College
(BTC), the College of Agricultural Banking (CAB), the Indira Gandhi Institute of Development
Research (IGIDR), the Institute for Development and Research in Banking Technology
(IDRBT), the National Institute of Bank Management (NIBM), the Indian Institute of Banking
and Finance (IIBF), Indian Institute of Bank Management (IIBM), Institute for Banking
Personnel Selection (IBPS) and now the Centre for Advanced Financial Research and
Learning (CAFRAL). And, we have not yet stopped; we are now at work to establish an RBI
Academy.
6. The other financial market regulators who came later have also imbibed this spirit
and have established institutions to meet the needs of their sectors. For example, the
Securities and Exchange Board of India (SEBI) has established the National Institute of
Securities Management (NISM) and the Insurance Regulatory and Development Authority of
India (IRDAI) has established the Institute of Insurance and Risk management (IIRM).
7. We can also observe this trend in the regulators of other countries as well, be it in a
developed nation or in a developing nation or region. The Federal Reserve Bank, the Bank of
England, the Bundesbank, the Banque de France, the International Monetary Fund, the
World Bank and others have all established capacity building institutions and arrangements.
Why this obsession?
8. Finance is primarily a knowledge oriented activity. The chief capital and inputs
required for this sector all relate to "information" and "knowledge". This "information" and
"knowledge" is highly dynamic; new research and new concepts crop up every often. The
paradigm changes in the sector has very wide ramifications; the sector is highly
interconnected; happenings in this sector has high visibility. That means that the regulators
have to be upto date with such cutting edge "information" and "knowledge"; be abreast of the
developments in the sector; and be hands on. On top of these, these efforts have to be
continuous and over the whole career. That is why the regulators typically have such
capacity building institutions under their direct charge.
Background and overview of key recommendations
9. Another significant feature of Indian financial sector is that the Government is also
equally keen on supporting these efforts. Before the regulators came on the scene, it was the
Government which played the catalyst in establishing several capacity building arrangements
for the securities and insurance sectors. The National Knowledge Commission, established
in 2005 as a high-level advisory body to the Prime Minister of India, has made several
recommendations, with the objective of transforming India into a knowledge society. Several
of these recommendations are being implemented.
10. Further, the Financial Sector Legislative Reforms Commission (FSLRC), established
in 2011, has, while recommending a major transformation of the legal foundations for Indian
finance through the enactment of the Indian Financial Code (IFC), made several
recommendations which pertain to capacity building in banks and non-banks, streamlining
training intervention and other related measures. As you are aware, it is in this context that a
Committee on capacity building in banks and non-bank institutions in India was constituted
by the Reserve Bank and Shri Gopalakrishna headed that Committee.
11. Let me begin by outlining what really the Reserve Bank had in mind when the
Committee was constituted. The thrust was on the entire gamut of human resource skill set
which is required for improving the efficiency of the employees of banks and NBFCs, which
would in turn help the organisations individually and benefit the financial system as a whole.
The issue is the level of intervention that would ideally be required in terms of enhancing
their skill building - entry level expertise, training requirements both initially and on an
ongoing basis, skill sets and qualifications required for certain specific and specialised areas,
and exploring the need and methodologies for prescribing certification for required
qualifications. In short, the most important deliverable for the Committee thus was to identify
capacity building requirements keeping in view the role of the financial sector and what it
should deliver.
12. Key recommendations of the Committee are in the areas of HR management
practices, training methodologies and innovations, system wide institutions and processes,
exploring mandatory certification requirements and amplifying capacity related requirements
in Boards of banks. I shall dwell on each of these aspects in some detail.
HR management practices
13. HR management is an important function for banks covering the whole gamut of
areas such as recruitment, role mapping, training, skill set identification, building up of HR
data base, and performance assessment. It is very important for this function to be taken up
as a specialised area and given its due importance rather than as just a routine operational
work to be done. HR is going to be at the forefront of change in the years to come and it
should be understood that banks having clear HR policies with awareness of employee
engagement and development will gain a vital competitive edge in a tough market
environment in the years ahead.
14. The HR function world over has undergone many developments / evolution over the
years, particularly from its administrative beginnings to a strategic orientation as is seen
today. However, it is a fact that in a majority of the banks in India even today, the HR function
is at best a supplementary function which is not given its due importance in the banking
hierarchy. There is a need for change in the mind set to underscore the fact that to drive your
efficiency, as well as the topline and bottomline in your balance sheets, you need skilled
resources. Such skill resource base is not possible if you do not have a structured approach
to the entire gamut of HR management.
15. HR is an essential element of corporate strategy and is invariably linked to the
performance of banks as well. I am happy to observe that this aspect has been emphasised
in the Committee report which talks about aligning human resource planning with strategic
planning to achieve the strategic goals of banks and non-banks. As you go about your
deliberations during course of the day, I am quite sure you will have some more clarity on
these aspects.
Training methodologies and interventions
16. A great deal of emphasis has been given in the Report on the process of skill
development, particularly on training needs and training strategies. As you are aware,
training enables employees develop the needed competencies to achieve the desirable
outcomes. Training ensures learning in a structured manner and reduces randomness.
Banks and NBFCs need to encourage a culture of learning on an on-going basis.
17. With a fast changing environment, skills and qualifications acquired could fast
become redundant if there is no on-going updation. While it needs no emphasis that the
initiative should also come from the employees themselves to keep abreast of the
developments, it is also the duty of the organisation to equip their employees by providing a
minimum training support at periodical intervals. Apart from taking away the monotony of
their daily work, and expanding their horizons and knowledge levels, it can also change
employee attitude and behaviour, thereby contributing to the organisational performance.
18. Studies have shown that training and effectiveness programs have a positive impact
on employee performance. In this backdrop, there is an interesting suggestion in the
Committee Report to introduce a system where employees have to pass a certification
program compulsorily to progress to the next grade in the hierarchy. It is in this context that
institutes like IIBF, IBPS, NISM and CAFRAL have a very vital role to play.
19. Another interesting suggestion is for training programmes to be combined with
certification which will improve training efficiency and will offer quality assurance. This will
also ensure that training efforts are taken seriously by the recipients.
System-wide measures
20. The next set relates to the steps needed to be taken on a system-wide basis to drive
capacity building. The Committee acknowledges the need to look beyond an individual
institution's perspective and consider various measures on a system-wide basis to support
and drive capacity building. The success of these measures would hinge on coordination and
collaboration of all relevant stakeholders. The Committee has outlined the various aspects
that need to be reckoned, including creation of accreditation agency, introducing Banking
Aptitude test, developing Centre of Excellence for Leadership Development for banking
sector, fostering development of data and research on skills in banking sector and improving
academic-industry interface, etc.
21. A very important suggestion is for an accreditation agency to be set up as an
independent quality assurance body for the banking sector which would be responsible for
accrediting learning initiatives within the banking industry. As per the report, the main focus
of the accrediting agency will be to accredit training institutes in the industry. When it comes
to implementing this recommendation, the modalities of such accreditation needs to be
worked out. I understand that this would be one of the issues which will also be discussed
today.
22. In this respect some other action is also needed. Of utmost importance are
discussions with the stakeholders - the banks, the premier training institutions, the bankers'
associations, and in the case of public sector banks, the Government itself.
Building capacities of top management and members of boards of banks
23. Public sector banks have been witnessing increasing number of younger officers at
top levels of hierarchy over the last few years. Some of them have risen rapidly thru senior
positions over a short period of time. While this can bring fresh perspectives on various
issues, it is also a fact that given the strategic importance of leadership at the top, it is
important to understand the training requirements of top management and fulfil the same.
The Committee has recommended mentoring programmes for CMD / CEOs of banks. I find
that CAFRAL has already carved out a niche for itself in this area.
24. We are all aware of the concerns that corporate governance weaknesses in banks
world over had contributed to the financial crisis. Doubts have been raised on the ability of
Boards of banks to adequately guide and oversee their institutions. There have been
questions on the role of Boards of Directors and the desired, but frequently missing, skill sets
of non-executive directors in light of lessons drawn from the crisis. Bank boards are in
constant scrutiny of the regulator, shareholders, and various stakeholders. Needless to add,
directors need to possess adequate skill sets and stay abreast of developments in the
financial sector to guide banks and steer them in the right direction.
25. In our country, in terms of the Banking Regulation Act, 1949, not less than fifty-one
per cent, of the total number of members of the Board of Directors of a banking company are
required to have special knowledge or practical experience in accountancy, agriculture and
rural economy, banking, co-operation, economics, finance, law, small-scale industry or any
other matter the special knowledge of, and practical experience in, which would, in the
opinion of the Reserve Bank, be useful to the banking company. There is thus no
requirement for a specific educational qualification for nomination as a Director.
26. What is interesting is that the Committee has deliberated in detail on the issue of
compulsory certification of individuals before their appointment as Directors on boards of
banks. While the Committee has recommended that such certification need not be
considered as of now, it has thrown open the debate on the knowledge and skill development
at the highest decision making body - the Boards. Formal and systematic induction process
and regular training intervention subsequently for members on bank Boards have been
recommended. These are some of the recommendations, which in my view, can be
implemented immediately.
Certification
27. Having discussed the recommendations in broad details, I would like to spend more
time on the specific issue of certification in more details. Why separate certification is
needed? Can't the academic credentials, university degrees, diplomas and certificates be
sufficient? These questions can naturally be raised. The answer is that several aspects of
banking and finance is becoming increasingly a set of specialised knowledge. As distinct
from an academic perspective, a practitioner's perspective is more relevant here. India is
poised for growth; along with stable growth, we will have a stable & low interest regime. This
will necessitate the capital market to grow much faster and larger. The financial instruments
and services that will be demanded by the investors and offered by the financial institutions
users will be much more in number and in complexity. Complex expertise in niche area will
be the increasing need of the hour. Attrition and Lateral recruitments will further exacerbate
this. Knowledge assurance will be an imperative. Customer rights and the financial
institutions' liabilities and proof of burden will be squarely on the shoulders of the financial
institutions. Legal and regulatory compliance will demand another set of special talents and
skills. If the banks and the financial institutions will have to meet all these challenges, they
will need the assurance that their operating officials are duly qualified to undertake the
respective responsibilities. And certification will provide that assurance.
Implementation of the recommendations
28. In so far as the implementation of the recommendations of the Committee are
concerned, since it involves among others, issues such as specialisation, entry point
qualification, special recruitments based on job roles and competency, accreditation agency
to be set up as an independent quality assurance body, national online aptitude test at entry
level as well as exclusive funding arrangement under the nomenclature of the Financial
Sector Development Fund with a large corpus (to be considered by the Government of India)
to support various capacity building initiatives, etc. it will have a significant bearing on the HR
policies of public sector banks. In view of this, we are in consultation with the Ministry of
Finance, Government of India and the Indian Banks Association on operationalising the
recommendations.
29. While the consultation process is underway, there has been some feedback that the
proposals of the report should manifest as broader guidelines for the banks' which are
recommendatory in nature and not mandatory. While several will remain so, requirements
like certification and accreditation can be mandatory. If this roundtable could discuss the
suggestions and arrive at a valuable implementation road map, it would be a welcome
feedback for the Reserve Bank as we finalise our policy on implementation of the proposals.
Conclusion
30. Banking sector plays a very important role in the economic growth of the country
and our banking system has to ensure that its capacity to deliver has to continuously evolve
and adapt to the developments in the sector. Banks have to make conscious and structured
effects in building such capacity, by putting in practice the various recommendations in the
Report. I am confident that the discussions in this roundtable will lead to specific road map
for action and provide clarity on issues.
31. Thanking you all for your patient attention.