Saturday, May 16, 2015

Revamping public sector banks

The government has a blueprint for revamping public sector banks even if it has not made it explicit. Broadly, it appears the government is set on the course chalked out by the RBI-constituted PJ Nayak committee on governance which came out with its report in May 2014. I have commented on the report in my blog. Just to mention some key recommendations and what the government has done so far:
  • Separate the roles of chairman and managing director: Announced. Committee to select a chairman constituted, which will be headed by the RBI governor. The Nayak committee wanted the separation to be effected at the end of Phase III (mentioned below), the government has done so right away.
  • Improve compensation at PSBs so as to attract a wider pool of talent: The finance ministry has advertised the position  of CEO at five PSBs and indicated that it is flexible on the compensation package.
  • Phase I: Set up a Bank Boards Bureau: This will comprise eminent bankers, other professionals and one representative of the finance ministry. The  BBB will select CEOs, independent directors and (in future) chairmen of banks. It will also advise banks on raising capital and restructuring strategies. This was announced in the last budget but the BBB is yet to be constituted.
  • Phase II: Set up a Bank Investment Committee to which the government's shareholding will be transferred. The BIC will take over the role and functions of the BBB. The BIC's stake in PSBs to fall below 51% so that PSBs are exempted from CVC, CAG and other requirements.
  • Phase III: Devolve all powers to independent boards of banks. Government may consider reducing its stake in the BIC itself to below 51%.
I am not sure that the political economy of the country will allow PSBs to get out of grip of the government in the near future. That apart, we need some quick decisions on PSBs. We really can't wait for the BBB to be set up before PSBs can move ahead. We need bank lending and private investment to revive quickly.

How do we achieve this? I explain my article in the Hindu, Get real with public sector banks.

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