Governor, Raghuram Rajan
An expert panel constituted by Reserve Bank has suggested that the government should cut its holding in public sector banks to under 50 per cent and criticized the way in which the lenders were being currently governed. The panel, headed by ex-chairman of Axis Bank PJ Nayak, said governance at the 26 Public Sector Banks (PSBs) suffered due to several “externally imposed constraints” like dual regulation by the RBI and finance ministry and external vigilance by agencies like the CVC and CAG, among others. “If the government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures, all these external constraints would disappear,” the report said. “This would be a beneficial tradeoff for the government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully,” it said. The panel said the government should distance itself from several governance functions and repeal the Bank Nationalisation Acts of the 1970 and 1980, together with the SBI Act and the SBI (Subsidiary Banks) Act. All banks should be incorporated under the Companies Act and a Bank Investment Company should be constituted where the government holding in all the banks should be transferred, the report said. The committee was critical of bank boards, including selection of directors. “It is unclear that the boards of most of these banks have the required sense of purpose, in terms of their focus on business strategy and risk management, in being able to provide oversight to steer the banks through their present difficult position. The boards are disempowered, and selection process for directors is compromised,” the report said. The solution to this problem lies with radical reforms from the government, and added we should not go in for “piecemeal and non-substantive” reforms, warning, “the fiscal cost of inadequate reform will be steep”. Stating that banks falter if the focus shifted away from financial returns, the report said, “the government is a good example of a bank shareholder which has suffered deeply negative returns over decades.” The committee also recommended some changes on the regulatory front, including expanding single investor shareholding caps to beyond the current practice of vetting every stake buy proposal of 5 per cent and above by the RBI, by making a new category of investors called ‘authorised bank investors’ (ABI). “It is proposed that an ABI be permitted a 20 per cent equity stake without regulatory approval or 15 per cent if it also has a seat on the bank board. All other financial investors should be permitted up to 10 per cent,” it said. Commenting on the report, Governor Raghuram Rajan said that” this is a candid report and examines a variety of issues dealing with the public sector system as well as the private sector banks. Since the report has a number of suggestions, it has to be taken as a whole and then examined, debated and considered.” The report also highlighted the need for bank licensing regime to move to a uniform mode for all broadbased banks, irrespective of their ownership. “It would be desirable for the bank licensing regime to move to a uniform licence across all broad-based banks, irrespective of ownership, subject to inter-jurisdictional reciprocity considerations in respect of foreign banks, and niche licences for banks with more narrowly defined businesses,” it said. It further said such a licensing regime would also involve uniform investment limits across investor categories, irrespective of ownership. Apart from the government’s own controlling stake, all other investment limits recommended for private sector banks should also thereby be applicable to public sector banks. “This will facilitate larger pools of capital coming into these banks, and assist in improving public sector bank market valuations,” the report added. For distressed public sector banks, it provides the government with another financing option through the induction of private equity with board representation, a partnership which could also help improve board governance. “Other than the government’s own stake, which would be unconstrained, all other investment limits for different categories of investors in private sector banks should also be applicable to investors in public sector banks,” the report added.