[Economics] P J Nayak Committee

Economics

P J Nayak Committee

·        Who is PJ Nayak?

Axis Bank, Ex-Chairman.

·        What’s the purpose of his Committee?

RBI setup this Committee to review the governance of Board of Banks in India. (Published in May 2014)

·        Gist of the matter

In government banks, Government owns >50% shares. Therefore Government has majority voting power. So, it can appoint (inefficient) type people as board directors and CMDs as per its own whims and fancies. Result: Scams like syndicate bank, and overall inefficiency.

Nayak says Government should transfer its shares to Bank investment Company (BIC), with functional autonomy.  (Then Government won’t be able to appoint directors as per its own whims and fancies) thus government bank’s “Governance” will improve.

Reform #1: Repeal laws

Nayak recommends Government to repeal following laws

·        Bank Nationalization Act (1970, 1980)

·        SBI Act, SBI subsidiaries Act

·        Because above acts require Government to keep shareholding >50%, and appoints CMDs and board directors. Once these acts are repealed.

Reform #2: Bank Investment Company

Once those acts are repealed

·        Step1: Government should setup a Bank Investment Company (BIC), under Companies act, 2013. As a “Core investment company”.

·        Step2: Government should transfer its shares of Government banks, to BIC.

·        Step3: Register all Government banks as ‘subsidiary companies’ of BIC, under Companies act.  (Because now BIC owns >50% shares in those company, so BIC is the parent “Holding” company and those banks became BIC’s subsidiary companies).

·        Consequently all banks will become “ltd”. E.g. Punjab national bank=> Punjab national bank ltd.

Implications

·        BIC will have the voting powers to appoint Board of directors and other policy decision during AGM of shareholders.

·        Government will sign an agreement with BIC, promising the autonomy. (that we’re majority shareholders in BIC, but we won’t interfere In your work- when you select directors, CMDs for those subsidiary banks.)

·        This is not an entirely new concept. In UK, Government has setup UKFI (UK Financial investment ltd.) for the same purpose.

Reform #3: Temporary “BBB”

·        When Bank investment company (BIC) will own >50% shares in those government banks, it’ll have the power to appoint Board of directors (And via them appoint the CMD).

·        But this requires repealing some acts = time consuming exercise because parliament sessions are not held 24/7/365.

·        But, we can’t wait that long, because Syndicate bank scam requires quick reform.

·        Therefore, Nayak recommends following temporary solution:

Ø     Until BIC is born, Government should setup a Bank Boards Bureau (BBB) at Mumbai.

Ø     This BBB will be made up of senior bankers. (3 members + 1 chairman; 3 years tenure)

Ø     They’ll advice on all board appointment, bank chairman/CMD and Executive directors.

Ø     Once BIC is setup, this BBB will be dissolved.

Pro Arguments

Nayak recommendations should be adopted because:

Private Banks	Government Banks
Chairman’s pay packages linked with bank profit. Hence he’ll always focused on raising customer base, telemarketing, advertisement, trying to sell maximum loans and so on.	Chairman’s pay not linked with profitability. He is appointed not for his talent but because he is in the “good books” of Government. He is not as ‘blood-thirsty’ for profit, like a private bank’s chairman.
They reinvest profit in branch expansion, advertisement etc. They do not invest profit in G-sec. (except for SLR requirements) Because G-Sec pays ~8% return, so better invest the money in any other activity that’d bring more than 8% return	They invest profit in G-sec. (Government securities) Because Government control their board of directors. so, Government indirectly forces bank to purchase its G-sec (so that they can run more schemes named after you know who) Same is done with LIC, EPFO and other institutions, where Government is majority shareholder. Economic survey calls this phenomenon “fiscal repression”. Consequence: these institutions never make large profit because they always make “safe-investment” in G-sec.
Only RBI supervision. They don’t fall under purview of CVC-CAG-RTI.	Since Government holds >50%, these banks are also answerable to RTI, CVC and CAG, apart from RBI. Consequently, senior bankers become cautious. They avoid taking bold- business decisions. All decisions taken by “Committee mindset” to dodge responsibility. Hence goernment banks don’t make large profit. So, it is necessary to ‘liberate’ them from clutches of CVC-CAG-RTI. Therefore, Nayak’s recommendation should be implemented- Government should reduce its shareholding to below 50% (by transferring shares to BIC and signing an autonomy agreement.)

Anti Arguments

Nayak recommendations should not be adopted because:

·        Subprime crisis, LIBOR scam, Global financial meltdown: all this happened because of MNC-Banks and financial conglomerates outside Government control.

·        Only 40,000 out of 6 lakh villages, have bank branches. If Nayak recommendations accepted then all banks will run only with ‘profit-motive’, no one will setup branches in villages. Then, financial inclusion can’t be achieved.

·        Counter argument: RBI rule requires all banks to setup 25% of branches in rural areas

·        If CVC-CAG oversight is gone, it is possible these banks will connive with corporate borrowers and money laundering. (Recall the cobra post sting on ICICI etc. private banks)

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