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

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.

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 Once these acts are repealed.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Once those acts are repealed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

category	age limit
minimum age for CEO, CMD, directors etc.	21
upper age for CEO/CMD	65
upper age: whole time directors	65
upper age: part time directors	70

 

Figures not important, except for bank exams

category	tenure limit
Chairman	minimum 5 years
executive directors	3 years
part time directors	7 years
cooling off period between re-appointment at same bank	5 years
cooling off period between re-appointment at any bank	2 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)

category	permitted 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 bank	Sarkaari 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 banks

Sarkaari 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 Bank	Government shareholding
BoB	56.26%
Central Bank of India	88.63%
SBI	58.60%
PNB	58.87%

So what’s new?

2010	Government decided- its minimum shareholding in any public sector bank, must not fall below 58%
2014, September	Finance ministry has sent a proposal to cabinet- to reduce shareholding to 52%. implications Government gets money by selling excess shares=helps filling up the fiscal deficit pothole. 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.