The committee to review governance of boards of public sector banks headed by former Axis Bank Chairman and Managing Director P. J. Nayak submitted its report a few days before the announcement of election results. The timing of the report is significant. Its major recommendations are — by the standards of the day — controversial, and are certain to be opposed by several sections. Major bank unions are already on a warpath. Many commentators are apt to dismiss the report as being too theoretical, unlikely to be implemented in a hurry. The incoming BJP-led NDA government will surely take considerable time to ponder over the committee’s key recommendations.

Yet, for all the initial scepticism the report has drawn, it is an important contribution, which can serve as a blueprint for financial sector reform, albeit with modifications. The Reserve Bank of India (RBI) Governor has made a strong case for accepting the report arguing that by implementing its key recommendations, the very many ills of public sector banks (PSBs) can be solved.

The committee was constituted by the RBI to review a crucial area of public sector banks’ functioning, which has ramifications for the entire financial sector. Corporate governance in public sector banks is weak, with most of the so-called independent directors appointed at government whims and fancy and are, therefore, not particularly qualified for their roles. However, the committee has conceded that theoretically at least, the board of directors of any PSB should be expected to represent a healthy balance of diverse interests and regions.

Government interference

Government interference has adversely affected corporate governance in PSBs which face dual regulation, the RBI being the banks’ traditional regulator. They also face dual external oversight from the CBI and CVC.

Not many outside the public sector will realise as to how deleterious the impact of these organisations have been on their normal working. There are so many instances of fear psychosis holding back commercial decision making.

Government interference has meant that policy objectives rather than commercial considerations dictate a PSB’s working. A less charitable way of saying is that it is because of government pressure that several PSBs have lent to unbankable companies. Not all the worryingly high non-performing assets that banks are saddled with are due to government interference but if banks had decided on purely commercial considerations, they would most certainly had been better off.

Government control has also made the appointment of top bank executives opaque. Many of them owe their appointments to considerations other than merit. Once appointed as executive directors, managing directors and in other senior positions the time for a quid pro quo starts.

This is not to say that all PSB top managers are below par and do not deserve to be there but as the Nayak Committee has observed they would be better off if they had a fixed tenure and face less outside pressure. Also, government control has capped the remuneration packages of PSB chiefs who earn far less than their often smaller private sector counterparts.

It is not surprising at all that PSBs lag behind private banks under several parameters, including asset quality and profitability.

Have the main points of the report been misinterpreted? The committee did suggest a reduction in government shareholding in PSBs to below 50 per cent but that is not privatisation of the dominant PSBs.

All PSBs will be incorporated under the Companies Act. All enactments under which they have been constituted will be repealed. With their value ‘unlocked’, PSBs should be able to tap the capital market. At the moment, all of them are dependent on the government for additional capital. The requirements are huge apart from their balance-sheet requirements to meet the new capital adequacy norms of international regulators.

New category

The committee has made other important recommendations that may be considered technical. For instance, it proposes a new category of authorised bank investors — made up of pension funds and many types of money market funds.

Consequently, there should be a widespread debate delineating the role of government, its merits as well as demerits. The merits of government shareholding cannot be denied. But what should the extent of control be?

narasimhan.crl @thehindu.co.in