The report has to be debated and considered: Rajan

The government should cut its holding in public sector banks to under 50 per cent, a Reserve Bank of India (RBI) panel report on Tuesday said, criticising the way in which the lenders are now being governed.

The panel, headed by ex-Chairman of Axis Bank, P. J. Nayak, said governance at the 26 public sector banks (PSBs) suffered due to several ‘externally imposed constraints’ like dual regulation by the RBI and the Finance Ministry, and external vigilance by agencies such as the CVC and CAG, among others.

“If the government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures, all these external constraints would disappear,” the report says.

“This would be a beneficial trade-off for the government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully,” it says.

The panel says the government should distance itself from several governance functions and repeal the Bank Nationalisation Acts of 1970 and 1980, together with the SBI Act and the SBI (Subsidiary Banks) Act.

All banks should be incorporated under the Companies Act and a Bank Investment Company should be constituted where the government holding in all the banks should be transferred, the report says.

Critical of bank boards

The committee is critical of bank boards, including selection of directors.

“It is unclear that the boards of most of these banks have the required sense of purpose, in terms of their focus on business strategy and risk management, in being able to provide oversight to steer the banks through their present difficult position. The boards are disempowered, and selection process for directors is compromised,” the report says.

The solution to this problem lies with radical reforms from the government, the report says, and adds, “we should not go in for ‘piecemeal and non-substantive’ reforms, warning, ‘the fiscal cost of inadequate reform will be steep.’’

Shifting focus

Stating that banks falter if the focus shifted away from financial returns, the report says, “The government is a good example of a bank shareholder, which has suffered deeply negative returns over decades.”

The committee also recommends some changes on the regulatory front, including expanding single investor shareholding caps to beyond the current practice of vetting every stake buy proposal of 5 per cent and above by the RBI, by making a new category of investors, called ‘authorised bank investors’ (ABI).

“It is proposed that an ABI be permitted a 20 per cent equity stake without regulatory approval or 15 per cent if it also has a seat on the bank board. All other financial investors should be permitted up to 10 percent,” it says.

Commenting on the report, Governor Raghuram Rajan said in New Delhi that “this is a candid report and examines a variety of issues dealing with the public sector system as well as the private sector banks. Since the report has a number of suggestions, it has to be taken as a whole and then examined, debated and considered.”

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