The government should cut its holding in public sector banks to under 50 per cent, an RBI panel report today said, criticising the way in which the lenders are being currently governed.
The panel, headed by ex-chairman of Axis Bank PJ Nayak, said governance at the 26 Public Sector Banks (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, among others.
"If the government stake in these banks were to reduce to less than 50 percent, together with certain other executive measures, all these external constraints would disappear," the report said.
"This would be a beneficial trade-off 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 percent 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 percent," it said.
Commenting on the report, Governor Raghuram Rajan said in the capital 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.
