 "P J Nayak")
The government is gung-ho about its seven-pronged strategy called ‘Indradhanush’ to revamp public-sector banks, but the main author of a report, which was supposed to guide these plans, is critical about it.
P J Nayak, chairman of an official committee that has recommended governance reforms for public sector banks (PSBs), has rapped the Narendra Modi government’s response in this regard.
A former head of Axis Bank, he said the reform strategy, which the government had announced last month, is lacking in many respects.
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Responding publicly for the first time since the government announcement, Nayak spoke on a range of areas crippling the country’s PSBs, the need to repeal the Bank Nationalisation Act, and to provide a level playing field to public and private sector banks. He was speaking at a conference organised by think tank Icrier.
“Indradhanush is inadequate… While it is not necessary to privatise Indian banks, it will be desirable to do it. It will be greatly helpful if government’s (equity) share in banks comes down to less than 50 per cent. A lot of the unlevel-playing field will immediately disappear,” he said.
While the government has projected the strategy as the biggest banking reform in four decades, Nayak said: “Reforms will begin when the government decides to rollback the laws.” He was referring to the Bank Nationalisation Acts of 1969 and 1980, the State Bank of India Act, and SBI (Subsidiary Banks) Act.
Unimpressed by the government’s version of the Banks Board Bureau (BBB) for search and selection of PSB heads (it is to include the Department of Financial Services (DFS) secretary and Reserve Bank f India, or RBI, deputy governor), Nayak contended this was no better than a finance ministry committee.
His panel’s report had recommended a professional BBB, only comprising senior bankers - three serving or retired bank chairmen - and no involvement of the government in this decision in any way.
“Can we not think of an independent body that makes these appointments? BBB has been announced by the government as well but in a very different way (from his report),” the former Morgan Stanley India head said. “If you put the DFS secretary and RBI deputy governor on the BBB, you don’t change anything. We had thought of a completely independent professional body. You might as well not have a BBB of that kind and have a committee in the finance ministry to handle it; it really does not substantively make any difference,” said Nayak.
The government had last month announced an amalgamation of measures such as recapitalisation of PSBs, performance-based incentives and appointments, among others. The seven broad heads of Indradhanush are appointments, BBB, capitalisation, destressing PSBs, empowerment, a framework of accountability and governance reforms.
Nayak said the government should consider bringing down its equity share in PSBs to less than 50 per cent, to ensure a level-playing field between public and private sector banks.
He said, “The government of India does not love its own banks.” The dual regulation for PSBs - finance ministry and RBI - topped Nayak’s list of criticism in this regard followed by wide disparity in the compensation for human resources of PSBs and private banks.
He added the government could continue to be equally dominant in shareholders meetings if it had a 45 per cent stake but banks will not suffer from an unlevel-playing field. “The law needs to be changed for this to happen,” said Nayak.
Reducing government shareholding below 50 per cent will free the banks from external vigilance emanating from the Central Vigilance Commission, from the Right to Information Act, and from government constraints on employee compensation, giving a free hand to the top management to compete with the private players.
“The only way this (unlevel-playing field) can be reversed is by repealing the Bank Nationalisation Act and distancing banks in their governance functions from the government; move over those governance powers to what we said should be a holding company; and from there to the boards of individual banks,” he said.
Pointing out the ‘shocking’ disparity in the compensation levels of heads of PSBs versus private banks, Nayak said: “While the CEO of a PSB earns an average of Rs 18 lakh per annum, that of the private sector earns an average of Rs 3.5 crore a year in addition to the stock options worth a multiple of that. To expect the behaviour of both to be identical when incentivisation system is so varied, is to live in an illusionary world.”
He pointed to the large differential in the return on assets between PSBs compared to private banks. While PSBs have two-third of the banking system's assets, their profitability is a third of the total. This shows the return on assets of the private sector is four times that of PSBs, said Nayak.
“The large difference in return of assets means that if PSBs are to continue in the business, the kind of capitalisation required to sustain these banks begins rising very rapidly. At some stage, if the government wants to hang on to these banks, it is going to affect fiscal consolidation.”
