RBI panel wants Centre to transfer its holding to a bank investment company - Times of India

The author has posted comments on this article TNN | May 14, 2014, 06.21AM IST

MUMBAI: Public sector banks, which account for 70% of the banking activity, could see the government stake fall below 50% if the Centre accepts recommendations of a panel constituted by the Reserve Bank of India to improve corporate governance in banking. The panel has also recommended that government investment in PSU banks be transferred to a bank investment company.

In January this year, RBI governor Raghuram Rajan had constituted an expert committee to review governance of boards of banks in India under the chairmanship of P J Nayak, former chairman of Axis Bank. RBI has invited comments on the report. After taking into account views from all constituents, the central bank will make its recommendations to the government.

According to the report, the financial position of PSU banks is fragile and is masked by regulatory forbearance which only delays recognition of this fragility. "It is desirable for the government to level the playing field for public sector banks in relation to their private sector competitors. "Reducing the proposed Bank Investment Company's investment in a bank to less than 50% will free the bank from external vigilance emanating from the Central Vigilance Commission, from the Right to Information Act, and from government constraints on employee compensation," the report said. The panel also wants the finance ministry to stop providing regulatory directions to PSU banks and make RBI the sole regulator.

"If the government stake in these banks were to reduce to less than 50%, together with certain other executive measures taken, all these external constraints would disappear. This would be a beneficial tradeoff for the government because it would continue to be the dominant shareholder and, without its control in the banks diminishing, it would create the conditions for banks to compete more successfully. It is a fundamental irony that presently the government disadvantages the very banks it has invested in," the report said

Many believe that the rise in bad loans in public sector banks is an outcome of poor corporate governance, including at the board level. To address this, the panel recommends that the board should be fully-empowered and held responsible for the bank's performance. The panel also wants more flexible CEO appointment norms to allow selectors to choose from outside and pay market-driven salaries.

The Nayak panel has sought to replicate the Axis Bank model for public sector banks. A large chunk of the private bank's shares were held by the government through the special undertaking of UTI (SUUTI). Although the bank was predominantly owned by public sector entities, the bank itself was in the private sector and not constrained by guidelines applicable to PSU entities.

The proposal to get the government to reduce its stake in PSU banks comes at a time when fiscal constraints are resulting in the government setting aside less than half the capital required by PSU banks. In February, following this year's interim budget, rating agency Moody's said that the Rs 11,000 crore set aside for capital infusion was not even half of the Rs 25,000 crore to Rs 36,000 crore that was required by state-owned banks. Analysts say that PSU banks require capital on two fronts. First to meet the stringent international Basel III norms and secondly to make good losses arising out of stressed and non-performing assets which many believe to be close to 10% of public sector banks' loans.