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Reserve Bank of India recently published its Report of the Committee to review the governance of boards of banks in India (the PJ Nayak Committee Report). What are the Committees recommendations and will its recommendations get implemented?
The Committee points out that the government does not have the money to inject the enormous amount of capital that the government-owned banks need between now and March 2018. Based on a scenario analysis, the Committee concluded that capital injection could vary from R2.10 lakh crore to R5.87 lakh crore. Given how large these figures are, the governments ability to achieve fiscal consolidation is impacted. So, either the public sector banks (PSBs) are privatised or, if the government wants to continue to own these banks, the focus needs to shift to design a radically new governance structure for these banks which would better ensure their ability to compete successfully.
A simple reality check suggests that the government cannot remain invested in its own banks. HDFC Bank just proposed raising R10,000 crore, which would result in an equity dilution of just 5.2%. But, if Bank of Baroda were to raise as much capital, the governments stake will get diluted by almost 25%. With Canara Bank, by 54% and Oriental Bank of Commerce, by over 100%.
But the Committee takes a more pragmatic view and assumes the government will want to remain invested in the 27 banks (including State Bank of India and its associate banks) that it currently owns. If it did not, this report would have been shelved by now. The Committee makes some compelling recommendations on how the government and RBI need to move ahead.
The Committee highlights how government ownership is impeding, not helping, PSBs in competing and growing. Regulation by both, the finance ministry (MoF) and RBI, board composition (to which I will turn to later), compensation levels, and finally, the overhang of the CAG, the CVC and the Right to Information Act are some of the issues that accompany government ownership. As the owner, the MoF feels compelled to exert direct control and lets the other statutory arms do so as well. It provides the needed cover from parliamentary questions and media scrutiny. But the key lesson from the recent financial crisis is that, irrespective of ownership, banks cannot be allowed to fail. A look at the recent history of bank failure in India echoes the same. But,