Column: RBI must exit bank boards

May 16 2014, 21:59 IST
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SummaryHaving a regulator on the board of the regulated actually makes the former a part of all actions

The issue of governance of bank boards has come to the forefront given the state of public sector banks (PSBs), in particular. The P J Nayak committee, set up by RBI to recommend a way forward, has brought out a rather interesting report. A lot of what has been said will find takers but the important question is whether or not the government would be willing to give the space that is being asked for.

While the committee has spoken about all that should be done, a simpler solution would be for the government to bring down its holding in PSBs to 49%. This way, it will still have representation on the board, but the organisation would be free to operate professionally. Thus, while recommendations have been made to lower government stake which will help the fiscal balances, it presupposes that this model would not be acceptable and suggests a new governance structure. The bold assumption is that the government would be willing to change the way in which it works through the banks.

The committee has made several suggestions on restructuring of PSBs’ boards. Again there are recommendations of setting up new structures to oversee existing structures. It talks of a Bank Investment Committee (BIC) to handle all government investments in PSBs. This would mean creating a company, having a CEO, a board and other office bearers subject to the same pressures as the PSBs.

Further, it suggests the creation of a Bank Boards Bureau (BBB) for selection of managements of PSBs. As there is a staff structure drawn up for BBB, it would run into the same problem where the selection of personnel for this board to select members of PSB managements would be driven by vested interests. A simpler solution would be just to let the UPSC select those eligible. This way, the best would come in, instead of those who are simply close to the government.

The board is a very powerful concept as it provides direction and guidance for any organisation. A recommendation made on the ‘skills’ of members of the board merits discussion considering that most of these directors are also on boards of other non-PSB companies in the private sector. The committee talks of enhancing their skills as often the quality of board deliberations was not up to the mark. This means that the committee believes that they may not be competent and could be out

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