What are the reform measures suggested by the Nayak Committee for PSBs?

The Public Sector Banks have to undergo some immediate and drastic reform measures if they have to continue in good financial health. There are two important problems that are to be settled by the PSBs. First is the high level of NPAs and second, the requirement of additional capital to meet the Basel capital standards by March 2019.

The RBI appointed Nayak Committee with the main responsibility of making recommendations about the working of bank boards and suggest corrective measures. In its report, the committee made focused recommendations for governance of PSB boards. It has stressed that government’s majority shareholding (50 and above) causes governance problems. The Committee observed that it will be better for the PSBs if the government continues to be the dominant share holder than the majority shareholder. The PSBs vis a vis private sector banks faces inconveniences due to multiple regulations by the government and the RBI and a level playing field is to be ensured by introducing reform measures.

1. Externally imposed constraints should be removed to set a level playing field between PSBs and private sector banks: The Report proposes that the Government shall distance itself from several bank governance functions which it presently discharges. For this, the government has to reduce its shareholding to below 50%. It will improve governance of banks and all externally imposed constraints will be removed. This will ensure a level playing field between PSBs and private sector banks.  

There are several external constraints imposed upon public sector banks which are inapplicable to their private sector competitors.  These include dual regulation by the Finance Ministry and the RBI; board constitution, where there no director is independent; significant and widening compensation differences with private sector banks, leading to the erosion of specialist skills; external vigilance enforcement though the CVC and CBI; and applicability (limited) of the RTI Act.

2. Formation of BIC: The Government should set up a Bank Investment Company (BIC) to hold equity stakes in banks which are presently held by the Government. The BIC would be constituted as a core investment company under RBI registration and regulation, and its business would be like that of a passive sovereign wealth fund for the Government’s banks. The Government and BIC should sign a shareholder agreement which assures BIC of its autonomy and sets its objective in terms of financial returns from the banks it controls. BIC in future will appoint directors to the boards of PSBs according to merit.

3. No discriminatory regulation on PSBs: The Government should cease to issue any regulatory instructions applicable only to public sector banks, as dual regulation is discriminatory. RBI should be the sole regulator for banks, with regulations continuing to be uniformly applicable to all commercial banks.

4. Professionalization of bank boards: The process of board appointments, including appointments of whole-time directors, needs to be professionalised and a three-phase process is envisaged. In the first phase, until BIC becomes operational, a Bank Boards Bureau (BBB) comprising former senior bankers should advise on all board appointments, including those of Chairmen and Executive Directors.

5. Enhancing investment in banks by other investors: In order to permit certain kinds of investors to take larger stakes, it is proposed that a category of Authorised Bank Investors (ABIs) be created, comprising all diversified funds which are discretionally managed by fund managers and which are deemed fit and proper.

6. The shareholding pattern and voting by shareholder in banks to be liberalized to encourage more investment.  The principle of proportionate voting rights should constitute part of the regulatory bedrock that fosters good governance.

7. The Government should end issuing instructions to public sector banks in pursuit of development objectives. Any such instructions should, after consultation with RBI, be issued by that regulator and be applicable to all banks.

As a follow up to the recommendations, government launched a programme called Indradhanush for reforming the PSBs.

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