Editorail: Sensible banking

Updated: May 16 2014, 02:35am hrs
It would call for a radical change in the mindset of any government to accept and implement the suggestions of the PJ Nayak committee, tasked by RBI to recommend ways to improve governance of banks. Governments of all hues, encouraged by bureaucrats, have tended to treat state-owned lenders as their fiefdoms and letting go would be hard. However, a sensible government would realise it has a lot more to win if these banks are better run. Much of their potential remains unrealised simply because the government interferes way too much in their running.

Without dwelling too much on the pastwhy public sector lenders are poorly supervised, why they have become so inefficient and financially fragileit is more than evident that boards of banks need to be revamped, professionalised and made more accountable. But for this to happen, there needs to be a drastic overhaul of rules and regulations. Which is probably why the committe believes the way out is for banks to be incorporated under the Companies Act and for the government to transfer its holdings to a Bank Investment Company (BIC). The BIC, will over a period of time, say, three years, pass on several of its powers to the boards of banks; that way banks cam be spared the damage being caused by dual regulationby RBI and the finance ministry.

The best way to tackle the several hurdles to good governance, the committee correctly argues, would be to let the government drop its stake in the banks to less than 50%. That will free banks from the purview of the CVC, the RTI Act and since they will no longer be PSUs, this will also allow them to pay their employees in the manner private players do. Even otherwise, given that the government is in no position to contribute to the capital that banks need in the next few yearsthe committe estimates they will need some R5.8 lakh crore over the next four yearsthis might be inevitable. Without the capital, state-owned banks will be even more handicapped, which is why the government would do well to recognise how serious the issue is and shed its stake to levels of 33% in a phased manneras once recommended by Finance Minister Yashwant Sinha during the NDA years. That way, the government could still retain control and enjoy a big share of the returns. Once there is less government control of banks and bank boards are empowered, institutional investors too would be more encouraged to pick up bigger stakes in these lenders. Allowing a new class of Authorised Bank Investorspension funds, provident funds, PEs including sovereign wealth funds (SWFs)to buy up to 20% of equity will bring in necessary capital; allowing PEs and SWFs to take a 40% controlling stake in distressed banks is also a good idea since such banks cant raise capital otherwise.