Programme Paralysis


The architects of the Nayak committee set up to review governance of boards of PSBs seem to have had a Rip Van Winkle moment.

Policy paralysis will be overcome. Once again, there is an excited talk of growth, deregulation and privatisation. A few days before the May election results were declared, a committee appointed by the Reserve Bank of India (RBI) to review governance problems of all banks including public sector banks (PSBs), submitted its report in less than the stipulated three months. It suggested that the way out for PSBs was disassociation from the public i.e. government control. It also suggested that government should reduce its equity share to below 51 percent. A holding company should be created to reduce the direct interference of the government and improve efficiency and, both government and RBI should not be part of the appointment process for the director. RBI and the government should also withdraw their director-nominees from PSB boards. If the government reduces its stake in the banks to just about less than 50% it takes the banks out of the tyranny of Central Vigilance Commission and Right to Information (RTI), while keeping the state as the dominant shareholder. It had also suggested that by doing away with the committee approach of decision making, no single person could be held accountable if something goes wrong. (hoping that no single person can possess all the right information to make the correct and quick decisions are still worth the sacrifice of depositors money). All PSBs will thereafter be incorporated under the Companies Act. All ‘nationalising’ enactments under which they have been constituted will be repealed. At the moment, all of them are dependent on the government for additional capital requirements. The requirements are huge apart from their bad assets. There are also balance-sheet requirements to meet the new capital adequacy norms of international regulators. Bank Unions have just released a list of about 400 such debtors, who have over Rs 73, 000 crores of bad loans against them.The reasoning is that as government reduces its equity ownership, bank stocks will be available to private investors, the ability of the board of directors to steer banks to higher profitability and lower bad debts will rise, the capacity to raise fresh equity and increase their capital base will rise, so will the talent to avoid irksome government interference and regulation. This is the virtuous cycle envisioned by the Nayak Committee Report as by other privatisers before. This report also comes in the wake of pressures to increase the number of private banks for whom it suggests only incremental less far reaching, changes in governance.

At the moment the composition of the PSBs boards represent diversity of public interests, there are three directors representing minority (non-government) shareholders’ interests; three directors who are expected to represent societal interests; a director each representing the union government, workmen, officers, and regulator (RBI). In addition an independent chartered accountant is appointed as a director and the person usually heads the audit committee. The bank also has three or four wholetime directors including the Chairman and Managing Director (CMD). The Nayak Committee thinks that in effect this is entirely a public selection/nomination process since the non-government shareholders are also usually public held financial institutions. In sum the banks interest as an independent financial organisation are not separated from the interests of the government sufficiently. Many bank directors owe their appointments to considerations other than merit. Once appointed as executive directors, managing directors and in other senior positions the time for a quid pro quo starts. Oddly the report does not mark that in a privatised scenario the directors would represent shareholders i.e. private corporate interests even more strongly.

The architects of this report seem to have had a Rip Van Winkle moment between 2008 and 2014 when the developed world has been through a catastrophic recession and programme paralysis triggered by such a vigorous, virtuous cycle of deregulation of the financial sector in USA. That is why it needed such little time. This unitary solution to governance problems has acquired a cult following in messianic times.


Anuradha Kalhan

The writer is a Lecturer, Dept of Economics, Jai Hind College, Mumbai.