The government is likely to set in motion the process of establishing a Bank Investment Company (BIC) to hold its stake in public sector banks (PSBs) following substantial consolidation in the public sector banking space and clean-up of banks’ balance sheet in the last couple of years.

With the banking space seeing fast-paced changes vis-a-vis business models and technology, top bankers feel now is the right time to set up a BIC so that decisions can be taken quickly without the fear of the 3Cs — Central Vigilance Commission, Comptroller and Auditor General and Central Bureau of Investigation.

BIC was mooted in 2014 by the Reserve Bank of India’s (RBI) PJ Nayak Committee Report to review governance of boards of banks.

While the government, as per one of the Committee’s recommendations, has already set up a Bank Boards Bureau (in 2016) for selecting the top management of PSBs, it has kept the BIC proposal on hold so far.

“PSBs are very large commercial organisations. We have to take quick calls. Currently, the 3Cs are holding us back to an extent. The holding company (Holdco) structure has to be formed now. The Government is believed to be evaluating this. This is the right time as our (PSBs) balance sheets are adequately provisioned ,” a top banker said.

Autonomy to public sector banks

Referring to several countries, including Singapore, the UK and Belgium, having intermediate investment companies to hold the equity in banks, the RBI report observed that this has operationally distanced the governments from the banks.

This has discouraged direct intervention and suasion, and has helped align the governments’ role as that of the principal shareholder in the banks, focused on financial returns, it added.

The report noted that the SUUTI (Specified Undertaking of the Unit Trust of India) example in relation to Axis Bank is broadly similar. The character of BIC’s business would make it resemble a passive sovereign wealth fund for the Government’s banks.

“Today, things are moving so fast that in one year the business model can change completely. The technology can change. So, we can’t wait for a year or one-and-a-half years for vigilance clearance to finalise a vendor. We have to be very quick, otherwise we will lose ground to the agile private sector rivals,” the banker quoted above said.

Recap burden

In the context of the Government facing fiscal constraints and its reported plan to have a maximum of four public sector units and a minimum operating unit in each of the 18 identified strategic sectors, top bankers opine it may be apposite to put in place a BIC.

The reason: by allowing more retail and private sector participation in the ownership of PSBs, the burden on the Government for recapitalising them will come down.

The RBI report emphasised that reducing the proposed BIC’s investment in a PSB to less than 50 per cent will free the bank from external vigilance emanating from the Central Vigilance Commission, from the Right to Information Act, and from Government constraints on employee compensation.

“The trade-off is worth grasping, as more competitive public sector banks will enhance financial returns to the Government with no effective dilution of control,” the Committee said.