The Nayak Panel report is yet another opportunity for the Indian government to dispose of its holdings on state-run banks and make them practically free of its control. This is also a golden opportunity for RBI to consider if applicants for the new bank licence can be offered first direct investment in these banks

A panel of experts headed by PJ Nayak, the former chairman of Axis Bank set up to examine and recommend how these institutions can function more effectively, without much hindrance, submitted its report, which, Reserve Bank of India (RBI) governor Dr Raghuram Rajan has called as "candid".This panel looked into the working of 26 public sector banks (PSBs), and the report says that these institutions "suffered due to several externally imposed constraints, like dual regulation by RBI and the Finance Ministry" besides external vigilance by agencies such as Central Vigillance Commission (CVC) and Comptroller and Auditor General (CAG), among others.

The recommendations made by this Panel may have far reaching implications, such as reduction of government holdings to less than 50%, including certain executive measures, and eliminate the constraints, if these were accepted and implemented. The Panel report says that it would be necessary to repeal the Bank Nationalization Acts of 1970 and 1980 together with SBI Act and SBI (Subsidiary Banks) Act. In fact, it suggests that all Banks should be incorporated under the Companies Act and a Bank Investment company should be established where the government holdings in all the banks should be transferred. This committee is critical of Bank Boards, including the selection of directors, which is "likely" to be compromised.

Further, it says that the solution to the problems lie with the need to radical reforms being implemented by the government, not on a piece-meal basis and non substantive reforms, warning that "the fiscal cost of inadequate reforms will be steep".

Additionally, the Panel recomends that the present holding restriction of 5% be replaced by a new category of investors, to be termed as "authorized bank investors" who should be permitted a 20% equity stake without approval and a 15% limitation if it has a seat on the Bank board. Rest of the financial investors should be permitted upto 10%, according to the report.

The RBI governor is reported to have said that as the Nayak Panel report has a number of suggestions it has to be taken as a whole and then examined, debated and considered.

In studying this issue briefly, we may mention, that in the early part of our Banking history, we had the presence of five scheduled banks, known as 'the Big Five' in the financial world. But in the past few decades, many things have happened, after the nationalisation and continuous developments taking place in this sector.

Recently, it may be recalled that as many as 26 applicants sought to obtain new banking licence and RBI, eventually, has issued to only two approvals, though, now, any institution desiring to obtain a banking licence may apply and obtain it, identifying the specific service or operations that they may wish to cater. RBI will consider such application on its merits.

In the last few weeks, working results and balance sheets have began to appear in the leading newspapers. Taken in random, the results of the following can be of interest to readers:
 

Some of these may have non-performing assets (NPAs), but on the whole, they have healthy balance sheets and good reserves and are generally considered as blue chip institutions.

In light of the recommendations made by the Panel, headed by PJ Nayak, it would be interesting if the new Government can review and consider following radical approach:

a) bring down the government holdings, if necessary, over a 5 year span, to 26%

b) offer the balance of the government holdings, or at least a substantial part of it, to the "authorised bank investors"

c) the "authorized bank investors" to include the balance of the 23 applicants for the new bank licence, who were "unsuccessful" in their attempt

d) ensure that the Board of Directors are positions that need to be offered to those who have atleast 10-15 years actual banking or experience/knowledge of financial institutions (not as a resting place for a "cushy" job for retiring government officials, politicians and their friends and relatives)

e) the Panel's recommendation of "10% holdings" to all investors should include NRIs/OCIs

Such a move by RBI would be welcome change if the government at the Centre approves all

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)