The report of an RBI-appointed committee under the chairmanship of former Axis Bank head P.J. Nayak that reviewed issues of governance in banks was released just before the announcement of the parliamentary election results. There is a risk of the report getting lost in the abundance of official and non-official recommendations and suggestions on financial sector reform that are now available to the new government. On the other hand, the committee’s report might well be the blueprint that a new government that is keen on reform might consider adopting, albeit with modifications. The report has already become controversial, with major bank trade unions threatening to go on strike against its key recommendations that are centred on the dilution of government ownership in public sector banks (PSBs) to 50 per cent of their paid-up capital, and the revamping of their boards. No one doubts that PSBs suffer from external constraints flowing from dual regulation by the Finance Ministry and the government. They also face severe restrictions in being subject to external vigilance — by the Central Vigilance Commission and the Central Bureau of Investigation. Corporate governance has suffered because of weak board supervision and excessive government interference. These in turn have resulted in policy objectives rather than commercial considerations dictating business decisions. There has been a lack of transparency in appointing top managers of PSBs. Most of them are not able to stand up to government interference and this has largely contributed to weak governance. PSBs lag behind private banks with respect to a wide range of parameters such as profitability and asset quality.
An immediate task before the government as the majority owner stake-holder in these banks is to find very large amounts of capital to take care of their impaired assets and also meet the international capital adequacy norms following their shift to Basel-III, which is imminent. The Nayak Committee has proposed that the government stake in the banks be transferred to a separate bank investment company which will be professionally managed and be able to raise resources. A separate category of authorised bank investors (ABIs) will be allowed to own up to 20 per cent of a private bank without regulatory approval. On the face of it, recommendations such as this are not for the PSBs, but they will be applicable once the government brings its stake down to 50 per cent or below. It is therefore not surprising that many, even those who are not on the side of the bank unions, see the report as a push towards bank privatisation. It is precisely on that score that the report, though well-intentioned, needs a great deal of deliberation.
