A visit to a public sector bank and a private sector bank brings out a noticeable difference in the way they function. Their bureaucratic style of functioning often irks many and makes them less productive. Over past few years, there’s been a sharp deterioration in the asset quality of PSU banks, which in turn hindering their performance. And it is often that the Government has to infuse capital to keep PSU banks going. It is noteworthy that PSU banks account for nearly 70% of total banking activity in the country and their performance can affect the economy as a whole. To review governance of banks in India, the Reserve Bank of India (RBI) appointed a committee headed by Mr PJ Nayak (the former chairman of Axis Bank) whose comprehensive assessment highlighted several shortcomings in the governance of PSU banks.

Problems with PSU banks

The committee specifically talked about the external constraints; meaning those which can’t be corrected by improving internal practices of a PSU bank. The committee highlighted the shortcomings in the governance that make PSU banks incompetent as:
 

• Dual accountability (where PSU banks are regulated by RBI as well as the finance ministry)
   
• Short average tenures of Chairmen and Executive Directors
   
• Uncompetitive compensation structure
   
• External vigilance and applicability of Right to Information (RTI)
   

The committee is of the view that often PSU banks are subject to obligations which are exclusively imposed on them. This makes them uncompetitive against their private sector counterparts. The committee opined that unless these constraints are removed, managements of PSU banks would continue to face similar problems even in future.

The recommendations of PJ Nayak Committee

The committee has suggested two remedies for making PSU banks more competent. It is of the view that either these banks should be made private or their structure should be remodeled. The committee has suggested abolishing Bank Nationalisation Acts of 1970 and 1980, along with the SBI Act and the SBI (Subsidiary Banks), and bringing banks in the purview of company law. There is also a recommendation that a Bank Investment Company (BIC) should be formed and Government should transfer its stake in PSU banks to BIC. It will have a stature equivalent to that of a passive sovereign wealth fund and the autonomy of BIC be protected.

The other important recommendations include:
 

• A separate category called Authorised Bank Investors (ABIs) should be created which may pick upto 20% stake in a bank without taking any prior approval provided that it will have no right to appoint a board director
   
• Stake ceiling for promoter investors (other than ABIs) should be raised from 15% to 25%
   
• Government should not issue any instructions applicable only to public sector banks
   
• Government should not give any target to banks for achieving development objectives
   

PersonalFN is of the view that, if implemented, recommendations given by P.J. Nayak committee may bring revolutionary changes in the governance of PSU banks. However, PersonalFN believes recommendation may face steep resistance from bank unions, which until now have suppressed progressive measures. PersonalFN also believes that if Government renounces its control over PSU banks, they would enjoy greater autonomy in decision making. Also removing the target for PSU banks to achieve development objectives would help them concentrate on their core business. PersonalFN is also of the view that, governance of PSU banks is majorly affected due to dual accountability which eventually impacts their performance.

Although there is a remote possibility of privatisation of banks, new structure of PSU banks would assist in achieving the objective of fiscal consolidation. So don’t be surprised if a public sector banks serve you more efficiently than a private sector bank going forward, if the recommendations of the committee are well-accepted.

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poo3009@gmail.com May 18, 2014 The present problem of HRDD in Banks is not at all addressed. The interference of the Ministry in the functioning of the Banks is also not given due attention. If the Banks are privatized at this stage, what will be the fate of implementation of Basel III norms? Like this there are umpteen no of issues unaddressed.......

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