[Banking] P.J.Nayak Committee 51% shareholding, Gopalkrishna Committee HR reforms in Banks & Non-Banks

Economy21 Comments

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  1. Prologue
  2. T1: PJ Nayak Committee on Board governance
    1. Reform #1: Repeal laws
    2. Reform #2: Bank Investment Company
    3. Reform #3: Temporary “BBB”
    4. Misc. Reform #1: Age and tenure reforms
    5. Misc. Reform #2: Private shareholding
  3. Nayak Pro arguments
    1. #1: competitiveness
    2. #2: CVC-CAG-Risk aversion
    3. #3: Fiscal repression and Profitability
    4. #4: Bailouts
    5. Nayak Anti-arguments
  4. T2: FM wants 52% shareholding in banks
  5. T3: Gopalkrishna Committee on “Capacity building”
    1. Reform #1: Recruitment
    2. Reform #2: Training
    3. Reform #3: Staff-Transfer
  6. Mock Questions

Prologue

Combining three topics of current affairs 2014

  • May Week2: PJ Nayak Committee report
  • Sept. Week2: FM proposal for 52% shareholding in banks
  • Sept. Week4: RBI Gopalkrishna Committee report

T1: PJ Nayak Committee on Board governance

RBI Committees made by Raghuram Rajan

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?

  1. In Sarkaari banks, Government owns >50% shares.
  2. Therefore Government has majority voting power.
  3. So, it can appoint (inefficient but ustaad-in-chamchaagiri) type people as board directors and CMDs as per its own whims and fancies. Result: Scams like syndicate bank, and overall inefficiency.
  4. 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 Sarkaari bank’s “Governance” will improve.
P J Nayak Committee recommendation Banking investment company

Gist of Nayak Committee recommendations

Reform #1: Repeal laws

Nayak recommends Government to repeal following laws

  1. Bank nationalization Act (1970, 1980)
  2. 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 Once these acts are repealed.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Once those acts are repealed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 Sarkaari banks, to BIC.
  • Step3: Register all Sarkaari 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?

  1. BIC will have the voting powers to appoint Board of directors and other policy decision during AGM of shareholders.
  2. 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.)
  3. 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 Sarkaari 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:

  • Until BIC is born, Government should setup a Bank Boards Bureau (BBB) at Mumbai.
  • This BBB will be madeup of Senior bankers. (3 members + 1 chairman; 3 years tenure)
  • They’ll advice on all board appointment, bank chairman/CMD and Executive directors.
  • Once BIC is setup, this BBB will be dissolved.

Misc. Reform #1: Age and tenure reforms

 

Figures not important, except for bank exams
categoryage limit
minimum age for CEO, CMD, directors etc.21
upper age for CEO/CMD65
upper age: whole time directors65
upper age: part time directors70

 

Figures not important, except for bank exams
categorytenure limit
Chairmanminimum 5 years
executive directors3 years
part time directors7 years
cooling off period between re-appointment at same bank5 years
cooling off period between re-appointment at any bank2 years

Misc. Reform #2: Private shareholding

  • At present: an individual person/Mutual fund etc. cannot own more than 5% shares in a Sarkaari bank. (At maximum 10%- after RBI permission).
  • Nayak proposes following reforms:
Increase the shareholding limits (figures not important)
categorypermitted shareholding in bank
all financial institutions
  • upto 10%
New category: Authorised Bank Investors (ABI). It’ll include pension funds, mutual funds, ETF etc. approved by RBI
  • 15% if he is board member
  • 20% if he is not a board member

Nayak Pro arguments

Nayak recommendations should be adopted because:

#1: competitiveness

Private bankSarkaari bank
  • 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.

#2: CVC-CAG-Risk aversion

  • Private banks: only RBI supervision. They don’t fall under purview of CVC-CAG-RTI.
  • Sarkaari banks: Since Government holds >50%, these Sarkaari 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 Sarkaari 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.)

#3: Fiscal repression and Profitability

private banksSarkaari banks
  • 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.

To stop this nuisance of “fiscal repression”, it is necessary that Government holds <50% shares in any Banks.

#4: Bailouts

  1. Earlier, Government had forced Sarkaari banks to use their money to bailout loss making UTI and IDBI.
  2. Sarkaari banks forced to give cheap loans to FCI, so that FCI can purchase foodgrains at a high Minimum support price (MSP)- to keep the farmer-votebank happy.
  3. Sarkaari banks forced to “waive” debts of farmers before election.

While all this may sound good to votebank and socialism but in the long term it harms the system at large.

  1. UTI-IDBI became complacent that even if we mismanage, they’ll bail us out. (Same goes with AirIndia).
  2. Farmers don’t cultivate pulses, oilseeds or vegetables. But only wheat and rice because FCI is paying them large MSP. Result: veggie-shortage and food inflation.
  3. Farmers don’t repay loans on time, hoping Government will waive their debts just before elections.

Again, to stop such nuisance, it is necessary that Government holds <50% shares in any Banks.

Nayak Anti-arguments

that Nayak recommendations must not be implemented AND Government must continue holding >50% shareholding in the Sarkaari banks 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)

T2: FM wants 52% shareholding in banks

As per the Bank nationalization acts, Government shareholding must not fall below 51% in Sarkaari (Public sector) banks.

Some Examples:
Sarkaari BankGovernment shareholding
BoB56.26%
Central Bank of India88.63%
SBI58.60%
PNB58.87%

So what’s new?

2010Government decided- its minimum shareholding in any public sector bank, must not fall below 58%
2014, SeptemberFinance ministry has sent a proposal to cabinet- to reduce shareholding to 52%. implications

  1. Government gets money by selling excess shares=helps filling up the fiscal deficit pothole.
  2. Government may give back that money to Sarkaari banks as ‘capital’ to meet the capital requirements BASEL-3 norms.

T3: Gopalkrishna Committee on “Capacity building”

Who is G.Gopalkrishna?

Earlier he was Executive director of RBI. HE couldn’t get promotion to Dy.Governor post, so resigned.

What’s Purpose of his Committee?

RBI setup this Committee for ‘Capacity building in banks and non-banks’.

Gist of the matter?

  • PJ Nayak= improve efficiency via reforms in Government shareholding and board of directors.
  • But what about reforms at “field” level? What about transparency-bank loan scandals, issues in recruitment-transfer-appointment process?
  • Therefore, Rajanbhai had appointed G.Gopalkrishna Committee
  • Sep 2014: Committee submitted report
  • Dec 2014: likely to be implemented.

Let’s check its major recommendations:

Reform #1: Recruitment

  • Common Bank aptitude test (BAT)
  • Should be conducted online
  • BAT score should be used for for entry-level recruitments in banks.

Reform #2: Training

  • Each bank should have a “chief leaning officer”. He’ll provide coaching-mentoring in leadership Development.
  • Top management in public sector banks are close to retirement and risk-averse. These banks need younger people, lateral entry and diversification
  • NIBM, IIBF, CAFRAL etc. should provide specialized training for foreign exchange rules, treasury Management, online security etc.
  • Banks should send staff to deputation in institutes, or even abroad- to enhance their skills.

Reform #3: Staff-Transfer

  • in Sarkaari banks there is shortage of manpower at mid-executive level because talented officers leave to join private banks and NBFCs.
  • Syndicate bank loan scam.
  • Ex-CJI Sathasivam also complained the same- short tenure not sufficient to bring large scale reforms- in judiciary.

In this backdrop, bank-transfer policy indeed needs to be revamped. Gopalkrishna recommends that:

  • Bank should not transfer staff in a mechanical manner.
  • Transfer should be done to provide good leaders across geography.
  • Posts that have high concentration of power- the transfer should be done on need-basis rather putting fixed-terms on it.

You can read the entire report on RBI official site click me. Truckload of fodder for bank interviews and group discussion.

Mock Questions

MCQ

  1. Match the following- Committee names on one side and purpose on the other side.
  2. List of recommendations given by xyz Committee. Then you’ve to figure out which statements are correct- only 1 and 2, only 1,2 and 4…

Civil service Mains exam

For UPSC mains, PJ Nayak important, but Gopalkrishna may be ignored.

  1. Write a note on the recommendations of PJ Nayak Committee. (they asked similar question about Damodaran Committee few years back)
  2. To make public sector banks competitive and profitable, there is a need to revamp its board governance. Examine the recommendations of PJ Nayak Committee in this regard.
  3. Discuss the arguments made in favor and against the reducing of Government shareholding in public sector banks.

Interview/ GD

  1. Argument in favor and against reducing Government shareholding?
  2. What steps are necessary to make public sector banks be made as profitable and competitive as private sector banks?
  3. (Bank-interview) Suggest manpower and HR reforms in public sector banks.

 

Mrunal recommends

  1. (free) NCERT, NIOS, TN-Books
  2. Environment by ShankarIAS
  3. Indian Polity M.Laxmikanth (Hindi | English)
  4. Art & Culture by Nitin Singhania (Hindi | English)
  5. Spectrum: Modern History (Hindi | English)
  6. Bipin Chandra: Post Independence
  7. Fast-track to Arithmetic Rajesh Verma
  8. MK Pandey’s Analytical Reasoning
  9. Disha’s Topicwise Paperset (Hindi | English)
  10. School Atlas
  11. Mains: Language papers
  1. (free) NCERT, NIOS, TN-Books 4 History,Geo,Sci
  2. Indian Polity M.Laxmikanth (Hindi | English)
  3. Spectrum: Modern History (Hindi | English)
  4. Maths: Quantam CAT Sarvesh Kumar
  5. Objective General English SP Bakshi
  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha


So far 21 Comments posted

  1. Prithviraj chauhan

    mrunal sir, pls upload article on IPR….

  2. INDICA

    UPSC RESULT OUT!!!

  3. prakash

    Reform #1: Recruitment

    > Common Bank aptitude test (BAT)
    >Should be conducted online
    > BAT score should be used for for entry-level recruitments in banks.

    **my question is All banks are conducting Aptitude test through IBPS which is common for all 19-20 banks excluding SBI
    even sbi is conducting test online through IBPS ..so what is new in this reform

    1. Bharat

      Prakash,
      I think they are recommending for a Unified exam for all PSBs,Sbi,Private Banks,Rrbs,co-operative banks,Rbi,Nabard,Sidbi,iifcl etc.. with Slogan
      One Sector One Exam

  4. amit

    grt woek rajtanil 😀

  5. amit

    grt work rajtanil 😀

  6. soni

    hello, anyone know about gujarat gov. scheme or any other private bank scheme for providing loan at less interest to pay fees for private IAS coaching, especially for girl, OBC…. If have any information regarding this than reply as soon as possible. kindly help me

    1. CSN_IAS2015

      @soni, Hey UPSC is uncertainty type exam, my take is coching is not enough, it doesnt give u creativity, knowledge is compulsory,knowledge is indepensable-words by 2009 topper, an even mrunal sir tells the same, Be Thorough wit basic+give mock tests,dont waste ur money. U ll get everything in net.

      1. Udham Yadav

        U r absolutely ri8 coaching can’t give us creativity so I avoid it and I have cleared this year prelims own my study @CSN

  7. phoenix-do or die

    Thank u Mrunal. Great article. Its always a pleasure reading your knowledgeable posts.

  8. shalini

    thanku sir…u r helping a lot

  9. Bhavna Sharma

    Thanks Mrunal Sir for the article.
    Also, if time permits, can you please cover a comprehensive article on “Coalgate scam + CAG’s role + Recent Supreme Court Verdict + its implications” in your lucid-yet-remarkable style? Although most of us have some superficial knowledge about the issue, but there a lack of clarity.

  10. binit

    sir if u can provide an article on BASEL 1,2,3…covering its a,b,c to x,y,z……

  11. SRINU

    Thank u sir……
    if time permits pls give one article i BESEL norms for Banks

  12. shalinilakkamthoti

    mrunal sir plz post ethics integrity and aptitude

  13. vijay

    What pj nyk rcmnded is totl afflunce of his pvt bnk’s affctn…. he evn ddnt thnk abt real india whch rsides in rural n remote area.. his aprch to ern proft only is a pvt sct aprch of makng mny.. bkws…prft mkng is nt evrthng..

  14. Arjun

    Govt withdrawing its shares and giving the same money as capital?

    As per this govt still a major player as giving the more money to banks then how it could contain its ownership and fix it at 52%?

    Sombody please explain how the share holding can be fixed at 52% despite giving more capital to government?

  15. Amit Singh

    Sir, it is not yet clear that how to check scandals and crisis if Government owns< 50%. Please clarify it.

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