The Centre should dilute its holding in public sector banks (PSBs) to under 50%, an RBI panel report said on Tuesday, criticising the way in which the lenders are being currently governed.
The panel, headed by former chairman of Axis Bank PJ Nayak, said governance at the 26 PSBs suffers 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.
“If the government stake in these banks were to reduce to less than 50%, together with certain other executive measures, all these external constraints would disappear," the report said.
The panel said the Centre should distance itself from the governance of banks and the Bank Nationalization Acts of 1970 and 1980, along with the SBI Act and SBI Subsidiary Banks Act, be repealed as it finds “the selection process for directors is increasingly compromised”.
The report further said that all banks should be incorporated under the Companies Act and a Bank Investment Company (BIC) be constituted to which the government transfers its holdings in banks. “The government’s powers in relation to the governance of banks should also be transferred to BIC,” the report added.
The report also has plan for board appointments. “In the first phase, until BIC becomes operational, a Bank Boards Bureau comprising former senior bankers should advise all board appointments, including those of chairmen and executive directors,” the report said.
The RBI also noted the need for a change in human resource policy changes, which would encourage younger people getting into top management and also recognized the significant and widening compensation differences between private sector banks and the public sector counterparts. “A more level-playing field with private sector banks is desirable,” the report said.
Noting governance issues in private sector banks, the report said that problems arise from ownership constraints stipulated by RBI that could misalign the interests of shareholders with those of top management. “Rigidity keeps out certain kinds of investors and thereby reduces the pool of capital that banks could otherwise attract. When individual shareholdings are small, investors also tend to be more disengaged. Allowing larger block shareholders generally enhances governance,” the report said.
The report also proposed for distressed banks, private equity funds, including sovereign wealth funds, be permitted to take controlling stake of up to 40%.
The report also said that boards of banks need to be vigilant about the quality of the loans. “In private sector banks senior management is incentivised on the basis of bank profitability, and the compensation is paid out through stock options. There is potential incentive to evergreen assets in order that provisions do not make a dent in profitability.”
The report recommended that in the case of evergreening, penalties be levied through cancellations of unvested stock options and claw-back of monetary bonuses on officers concerned and on whole-time directors, and that the chairman of the audit committee be asked to step down from the board.