Govt should reduce its shareholding in PSBs to below 50%: RBI Committee

May 16, 2014

An RBI committee headed by former chairman of Axis Bank PJ Nayak has said in its report that the government should bring down its stake in Public Sector Banks (PSBs) to below 50%.
Key Suggestions proposed by the RBI Panel:-
1) On existing Governance pattern of PSBs:
Criticizing the way in which the 26 PSBs are being currently governed, the panel blamed several “externally imposed constraints” like dual regulation by the RBI and finance ministry and external vigilance by agencies like the CVC and CAG for the distress of banks.
The government should reduce its stake in these banks to less than 50%, along with certain other executive measures for the removal of these constraints.
The Centre should distance itself from the governance of banks and the Bank Nationalization Acts of 1970 and 1980, along with the SBI Act and SBI Subsidiary Banks Act, be repealed as it finds “the selection process for directors is increasingly compromised”.
2) On Government’s powers in relation to the governance of banks
All banks should be incorporated under the Companies Act and a Bank Investment Company (BIC) be set up to which the government transfers its holdings in banks. BIC should be given power of governance of the banks. Until BIC becomes functional, a Bank Boards Bureau comprising former senior bankers should advise all board appointments, including those of chairmen and executive directors.
3) On existing Human Resource Policy in Banks
Change in human resource policy to encourage younger people joining top management. Private sector banks should be provided a more level-playing field with the public sector counterparts.
4) On governance issues in private sector banks
Ownership constraints that could misalign the interests of shareholders with those of top management must be removed. Allowing larger block shareholders generally enhances governance.
5) On distressed banks
Distressed banks, private equity funds, including sovereign wealth funds, should be allowed to take control of stakes of up to 40%.
6) On Evergreening of bad loans
Boards of banks need to be vigilant about the quality of the loans. The policy of private sector banks can be considered which incentivises senior management on the basis of bank profitability, and disburses the compensation through stock options. There is potential incentive to evergreen assets in order that provisions do not make a dent in profitability.
In the case of evergreening, fines can be slapped through cancellations of unvested stock options and claw-back of monetary bonuses on officers concerned and on whole-time directors, and that the chairman of the audit committee be asked to step down from the board.