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 Once these acts are repealed.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Once those acts are repealed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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