Saturday, May 31, 2014

P J Nayak committee on bank governance

The RBI committee on bank governance, headed by PJ Nayak, submitted its report earlier this month. The committee wants government to divest control and eventually its majority stake in public sector banks. PSBs are to be a run initially by Bank Boards Bureau, then by a Bank Investment Company (BIC) manned entirely by bankers and eventually by bank boards whose chairmen, directors and CEOs will be appointed by the BIC. The government's stakes in the BIC will eventually fall below 50%, which would mean privatisation.

The model the committee has in mind is Axis Bank (formerly UTI Bank) in which the government first distanced itself from management, then from control and went on to reap huge returns. Well, the government floated SBI at Rs 100 and its now trading at over Rs 2500.

Handing over the entire lot of PSBs to one set of bankers- unelected and unaccountable to parliament- is an enormous risk. It is also unnecessary. Boards of PSBs can be professionalised by government and the issues of management- succession planning, job rotation, training, recruitment of specialists from the market, etc- can all be done within the ambit of public ownership.

What we don't want is a set of PSBs handed over to private owners and managers who make their money and then take it bankruptcy- for the taxpayer to bail them out. If this happens in India on the scale we saw in the west in the financial crisis, that is a recipe for both political and economic turbulence.

I have a detailed critique of the report in EPW and a shorter commentary in the Hindu.

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