Reforming banks

A committee appointed by the Reserve Bank  of India, headed by PJ Nayak, has made a number of recommendations which will help to improve the governance and performance of public sector banks.

They may be considered as part of the proposals for  financial  sector reforms which are considered important by RBI governor Raghuram Rajan. Reports of two other committees – headed by Nachiket More and Urjit Patel – had dealt with other aspects of reforms. But the recommendations of the Nayak committee are perhaps more important and more sensitive because of the vital role public sector banks have in the economy and  the definitive say the government has in their working. Considering the large public investment in these banks and the need to make them serve the public interest better, the proposals deserve close attention.

The most important suggestion is that the government should reduce its stake in PSU banks to less than 50 per cent and set up a sovereign bank investment company as in the UK or Singapore. The committee also suggests  giving more powers to boards and restructuring of the managements so that banks can be run more professionally. The government’s interests as the dominant shareholder will be protected but it will not be able to exercise the kind of arbitrary control it exerts on the functioning of banks. The minimum tenures proposed for top functionaries who will be accountable to the board will ensure that they will not be subjected to governmental or political pressures they often have to face now.  There is a practical side also. The banks will need a capital infusion of about Rs 5.8 lakh crore in the next four years which the government will not be in a position to provide. Dilution of stake will also help to improve the fiscal position. The committee has also proposed a road map for transition over a period of time to a system based on its recommendations.

The entire gamut of the recommendations is intended to overhaul the banking system as such. They relate to the working of private banks too but are more relevant for the PSBs whose health is deteriorating. One main constraint of the public sector banks is that they are regulated by both the RBI and the finance ministry. The recommendations deserve serious consideration, if only because the government may not have many other options to keep the banks in good health.

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