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The real banking reforms: By not implementing many of Nayak committee proposals, the govt has disadvantaged PSBs

The current government has taken some steps towards reducing political interference—even its worst detractors will have to admit that the so-called phone-banking has reduced to a great extent—but meaningful PSB governance reforms will have to be institutionalised so that these do not depend on the good intentions of a few in the government.

The real banking reforms: By not implementing many of Nayak committee proposals, the govt has disadvantaged PSBs
For example, a few years ago, it was decided to induct private sector talent in the corner offices of PSBs.

The Centre is reportedly looking to strengthen the boards of public sector banks (PSBs) by specifying the tenure of the chairmen and conditions of their service. Among sundry other things, the proposal includes improvement of disclosures by bank directors about their interest in other commercial entities. While any move to empower PSB boards are welcome, it is high time the government moved beyond such incremental steps as they hardly move the needle and risk meeting the same fate as a few other initiatives taken in the past. For example, a few years ago, it was decided to induct private sector talent in the corner offices of PSBs.

The move flopped for two reasons: the new chairmen or CEOs felt stifled by their inability to make any meaningful changes where the rest of the organisation is steeped in a “PSB culture.” Secondly, nobody thought of empowering them—they did not even have the power to bring in general managers who could execute their vision. This is apart from the interference from the majority shareholder—the government.

There is no denying that, under the Bank Nationalisation Act, the government enjoys more powers than a majority stakeholder in any board-run company, including powers to supersede the board and issue directions to the banks “in public interest”. The current government has taken some steps towards reducing political interference—even its worst detractors will have to admit that the so-called phone-banking has reduced to a great extent—but meaningful PSB governance reforms will have to be institutionalised so that these do not depend on the good intentions of a few in the government.

Before privatisation is initiated, the Centre must create a level-playing field for PSBs to compete in the market. These include removing the dual regulation by the finance ministry as well as RBI. One former RBI Governor had often raised this issue. Besides, the external vigilance enforcement through the investigative agencies must be minimised.

The roadmap for the future does not need to be reinvented as the PJ Nayak Committee report in 2014 had some excellent suggestions on PSB governance reforms. But for some inexplicable reason, they remain on paper. The report proposed that the government distance itself from several bank governance functions that it presently discharges. For this purpose, it recommended that all banks be incorporated under the Companies Act, and a Bank Investment Company (BIC) be constituted, to which the government transfers its holdings in banks.

The Centre’s powers in relation to the governance of banks should also be transferred to BIC. Another suggestion was that the process of board appointments be professionalised under a three-phase process. While the first phase of setting up a Bank Boards Bureau has been implemented, the other phases are awaiting approval. In the second phase, the Nayak committee recommended, the appointment would be undertaken by the BIC, which would also strive to professionalise bank boards. In the third phase, the BIC would move several of its powers to the bank boards. The duration of this three-phase transition was expected to be two to three years only, but nothing has been heard eight years later. It is an irony that by not implementing these proposals, the government has disadvantaged the very banks it has invested in.

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