The recommendations of the P J Nayak committee on why and how the central government should give up its control of public sector banks (PSBs) have stirred a debate among bankers.
The panel, chaired by the former Axis Bank chief, was set up by the Reserve Bank of India (RBI) to look at various governance issues of all banks, including PSBs. For the latter, it has recommended a Bank Investment Company, to act as a holding company, aimed at curbing government’s direct interference and making these more efficient.
A Business Standard poll of 10 public sector bankers show 70 per cent in favour of government giving up its control and reducing equity stake below 50 per cent, also recommended by the Nayak panel. Most of those polled wanted to not be identified, due to the issue’s sensitivity.
Bankers not in favour say in many banks the government holding is much above 51 per cent, which could be diluted to bring in more equity. They said there was no immediate need for reducing the government stake below 51 per cent, as the markets are conducive at this point for equity raising. “It is also the right time for a QIP/FPO (qualified institutional placement and follow-on offers) because there is appetite from investors,” said the chairman of a mid-size PSB.
He agreed, though, that proper examination was needed for director appointments and that the board should spend more time on policy issues than day-to-day operations. The Nayak panel had pointed to the lax appointment process and suggested both government and RBI not be part of the appointment process. It also said both RBI and the government should withdraw their director-nominees from PSB boards.
The strongest criticism of Nayak came from Pratip Chaudhuri, ex-chairman of State Bank of India (SBI), the country’s largest lender. “The Nayak panel should have taken inputs from RBI before finalising the report. All the board-level appointments are made after RBI’s approval. The selection committee for appointment of chairmen and managing directors (of PSBs) and executive directors is headed by the RBI governor, though he delegates one of the deputy governors for the interviews. So, RBI is also responsible for top appointments. RBI cannot wash off its hands if there is lack of governance in PSB boards,” said Chaudhuri.
Adding: “So far as reducing stake below 51 per cent in PSBs, it is a question of policy of the government. But I would like to ask, why was Global Trust Bank merged with a PSB and not allowed to fall? Why did PSBs and (government-owned) Life Insurance Corporation bail out UTI and not any private entity?”
Bankers supporting the Nayak suggestions said these would instil more professionalism in decision making, particularly at a time when bad assets are rising and the need for capital will assume critical importance. “Banks will become more efficient, will be able to raise funds. Banks cannot depend on budgetary support perennially, as the govt has constraints,” said the chairman of a South India-based PSB.
On banks’ requirement for Tier-I capital, the Nayak panel estimated that by 2018, government banks would need Rs 5.87-lakh crore of capital infusion. The need for capital is one of the strongest arguments made by bankers who support the suggestions. “It is required as government is short of funds, the need is huge,” said the head of a mid-size PSB.
The panel’s recommendations will also improve the quality of directors in a bank, some argued.
“It will improve governance, especially accountability of independent directors,” said a chief executive of an associate bank of SBI. The panel had suggested doing away with the committee approach of decision making, in which no single person could be held accountable if something goes wrong.