P. J. Nayak Committee - Recommendations, Advantages and Disadvantages

P.J. Nayak Committee - Recommendations, Advantages and Disadvantages

Question - Autonomy for public sector banks continues to remain a contentious issue. Discuss the recommendations of the P.J. Nayak Committee report as well as the advantages and disadvantages of these.

Autonomy for public sector banks has remained a perpetual goal for banks as well as policymakers.

• Reform agenda has attracted its fair share of supporters and critics; autonomy in the current context is in terms of freedom for PSBs independent of their government ownership

• A crucial issue has been the dependence of PSBs on government owners for more capital

• Top management of PSBs has not been able to resist political will, according to many estimates

P.J. Nayak Committee Report

The P. J. Nayak Committee report was constituted by the RBI for making recommendations regarding corporate governance in PSU banks

Recommendations of the Nayak Committee

The committee has submitted its report on 12th May 2014 and made the following main recommendations:

• Scrapping and removal of Bank Nationalisation Acts, SBI Act and SBI(Subsidiary Banks) Act

• Conversion of PSBs into Companies as per the Companies Act

• Formation of a Bank Investment Company/BIC under the Companies Act; transfer of shares by the central government in PSBs to the BIC

• BIC in turn would have over the controlling power to boards of PSBs

• Government will only control earning return on investment

• Fair return on investment to the Central government would be the responsibility of BIC

• Appointments of CEOs, Inside Directors and top Executives of PSBs would be the responsibility of the Bank Boards Bureau constituting three serving or retired bank chairmans and the government would not be involved in this decision in any way

• Nayak committee also recommends proportionate voting rights to all shareholders and reduction of governmental shareholding to 40%

Points Against the Committee

• Bankers in disagreement with the report said that in many banks, government holding was above 51% which could be diluted to bring more equity

• Also, there is no need for reducing the government stake below 51% when markets are conducive for equity raising

• Proper examination is needed for director appointments and board should spend more time on policy issues; Nayak panel suggested government and RBI should not be part of the appointment process and both should withdraw their director nominees from the boards of PSBs

• All board level appointments are the responsibility of RBI and taking away this responsibility could have negative repercussions if PSB boards are not well governed

Points in Favour of Committee

• Bankers in support of the committee recommendations indicated its provisions would ensure more professionalism in decision making at a point where bad assets are on the rise and the need for capital is essential

• Banks will also be able to become more efficient and raise funds rather than depending upon budgetary support

• Moreover, the government suffers from various constraints when it comes to providing capital for the PSBs; this can be eliminated if the Nayak committee report is accepted

• Panel’s recommendations will enhance the quality of directors in the bank and improve the governance and accountability of independent directors in decision making

Facts and Stats

• Nayak panel estimates that by 2018, PSBs will need an infusion of INR 5.87 lakh crore

• PSBs are committed tor retain stake of government at 52% or above

• Innovative means will be used to acquire additional capital to meet Basel III capital adequacy norms and meet higher provisioning requirements

• Budget 2015 has also conferred autonomy on PSBs; holding company will be able to leverage its holding of quality shares thereby raising money for even those PSBs which are at a disadvantage

• Government has also run out of options for funds for the recapitalisation of PSBs and the fiscal responsibilities of the government will persist even after the shares are transferred to NOFHC, as per the 14th Finance Commission

• Budget 2015 has set aside INR 7940 crore for capitalisation of banks which is lower than what the budget had sanctioned in the previous year

• This is higher than INR 6990 crore allocated this fiscal to group of 9 PSBs measuring efficiency of parameters laid down by the government

• Autonomy for PSBs will remain tough till they gain financial independence