‘Only a Resolute FM can Help PSBs Deliver’
PJ Nayak says a govt keen to implement his panel’s proposals can ensure good returns on investment
A resolute finance minister can ensure a new governance and accountability structure for stateowned banks to ensure good returns on the huge amount of capital pumped in by the government, just as any financial investor would have done, P J Nayak, who headed a committee on governance and related issues of such banks, has said.
Nayak, whose report was unveiled on Wednesday, said that if there is no will or desire on the part of any government which owns these banks to carry out changes listed in his committee’s report, then it is the end. “But if there is a desire to do it, then this is the way to do it. We need a resolute finance minister to ensure it can be done,’’ he told ET in an interview on Thursday.
The committee's recommendations such as cutting the government’s stake to below 50% and a new Bank Investment Company (BIC) to which the government will transfer its holdings in state-owned banks managed on the lines of a passive sovereign wealth fund and aimed at ensuring good returns on investments, empowering the boards of these banks and ensuring they are run professionally could be potential game changers. Nayak, former MD and CEO of Axis Bank, said it was in the government's own interest to make the boards of government-controlled banks more professional. “The government has put in huge money in these banks and it has earned deep negative returns no other financial investor would have done it. Do you want this to continue?’’ he asked. Early reactions to the report centre around the political will of any government to carry out this huge transformation. Nayak, who worked with the finance ministry in his earlier avatar as a civil servant until the mid-1990s, pointed to the experience of 1991 when the government headed by Narasimha Rao and supported by officials and technocrats led by the then finance minister Manmohan Singh succeeded in implementing a spate of reforms. Such scepticism may have to do with past experience as in early 2000 when the NDA government abandoned an attempt to cut the government stake in state-owned banks to 33% in the face of political resistance and also the fear of loss of patronage. He held that the timing is opportune, given that banks need a huge amount of capital estimated by some at close to .` 6 lakh crore, bad loans, human resource challenges, changing demographics and with a new government set to assume office soon. “We have given the government a blueprint for creating a different accountability structure to make that less likely… The political resolve is to get good returns from your investment,” he said. The committee has focussed on the urgent need to empower bank boards and professionalise the managements. Nayak said that well-run boards will be able to steer banks away from their present difficult position. “So, you need a purposive board. You need talented and skilled professionals to sit on boards. There are many such people on boards today, but if you talk to bankers today, such people are small proportion of these boards. You don’t have independent board members today, it’s a complete violation of the listing agreement,’’ Nayak pointed out. The committee has outlined a transition period for the proposed changes. “In phase three, boards decide on where you want to get talent from. It should happen to all banks, not just SBI. Look at public sector banks in many other countries where compensation is benchmarked to the private sector. You can do this provided you have boards that can do this and provid- ed the boards are empowered. They should be able to get people from everywhere whom they think can get good leadership in top management,” he added.
Nayak said in the current structure, there are many anomalies, including saddling banks with a high statutory liquidity ratio (SLR). The SLR, he said, started as a genuine liquidity reserve decades ago when it was 5%, which was gradually raised to close to 25%, only to emerge as tool of fiscal policy to fund the deficit of the government routed through the Reserve Bank of India.
While there are concerns about the development role of banks in a changed scenario, Nayak is of the view that if it is a good development objective, it should go through all banks. The one advantage will be consultation between the government and RBI, which will be useful. “The intention should not be at the cost of depositors to dump obligations that are not profitable to banks on to them,” he added.
The head of the RBI-sponsored committee is also against putting a
timeline to listing for new banks. “If you have some one who wants to grow the bank slowly and cautiously, why not? With a great deal of attention to risk management within three years, he will be able to do very little. Then, you are asking him to list it in three years, which will mean that the kind of value he could have created for himself will not be created. In such a scenario, a good governance promoter might find himself “short-changed,” Nayak said.
“The whole purpose from a capital market perspective to list is to create value for minority shareholders and if RBI is pressing the promoter, you have forgotten about the minority shareholder. You are doing it because you want the promoter to get out of the bank or reduce his holding. But what about the new investors? There is a lot of asymmetric information available on unlisted companies that minority shareholders do not know... I have never understood why it should be a regulatory concern. It’s like a shotgun listing,” he explained.