Constraints facing public sector banks must be removed, says PJ Nayak

Dilution of Government’s stake below 51 per cent in public sector banks (PSBs) does not amount to privatisation, says PJ Nayak, Chairman of RBI committee to review governance of boards of banks in India.

In an interaction with Business Line , Nayak said, “There is a fundamental and deep irony that the Government has disadvantaged the very banks it has invested in. Why would the Government want to do it?

“All we are saying is, please remove these disadvantages being faced by PSBs. Government stake coming below 51 per cent is not privatisation.

“So, the view taken by some that the committee has actually recommended privatisation is incorrect. It is not part of the mandate of the committee.”

Nayak pointed out that the asset quality is a little stressed in public sector banks.

“Much more capital would need to be raised and the Government needs to contribute its share which would challenge fiscal consolidation.

“This is another reason why the Government might find it convenient to lower its stake in PSBs to less than 50 per cent, he said.

Nayak said that the committee had looked at many of the constraints that PSBs face.

It had argued that that many of these difficulties have arisen due to the Bank Nationalisation Act — which is basically an Act to take over banks. And though not meant to structure the governance of banks, it has provisions for structuring, he added.

Therefore, the committee suggested bringing the governance of these banks under the company law.

From 2013 onwards, a new Companies Act, which is well designed with both responsibilities and obligations thrust on the board of directors, has been operational and private sector banks are operating under it.

Nayak said that it was not possible to have two banking systems (public sector and private) where one is underprivileged and the other, privileged.

We have suggested that there be a one-licence regime where all banks, irrespective of their ownership (public or private), operate under the company law, said Nayak.

He pointed out many areas where the playing field is not level.

For instance, public sector banks cannot pay the same compensation as private banks.

PSBs have external vigilance enforcement (which the private banks do not have) through the Central Vigilance Commission (CVC) and the Central Bureau of Investigation (CBI).

PSBs are also subject to the Right to Information (RTI) Act in a limited way (private sector banks are not).

Nayak said that a level-playing field can be created if Government shareholding in these banks falls to below 50 per cent. Even if it falls to 49 per cent, the RTI Act, the CBI, and the CVC will not apply, and the the Government will no longer be bound by compensation constraints, he said.

Even with 49 per cent shareholding, the Government can do what it can with, say, 55 per cent stake, he added.

“It is the single most dominant shareholder. There will be no difficulty in the Government being able to get its way in whatever it wants in general body meetings and shareholder meetings. It makes no difference.”

Reducing the shareholding helps trim some of the constraints that PSBs face.

And, in the process, the Government creates better prospects for itself, because, if the banks perform better and become more competitive (as there is a level-playing field), the Government gets higher returns which, in turn, will benefit taxpayers, said Nayak.