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10/15/2014 Mrunal Banking: P.J Nayak Committee on Govt.

shareholding 51% 1/9
- Mrunal - -
[Banking] P.J.Nayak Committee 51% shareholding, Gopalkrishna
Committee HR reforms in Banks & Non-Banks
1. Prologue
2. T1: PJ Nayak Committee on Board governance
1. Reform #1: Repeal laws
2. Reform #2: Bank Investment Company
3. Reform #3: Temporary BBB
4. Misc. Reform #1: Age and tenure reforms
5. Misc. Reform #2: Private shareholding
3. Nayak Pro arguments
1. #1: competitiveness
2. #2: CVC-CAG-Risk aversion
3. #3: Fiscal repression and Profitability
4. #4: Bailouts
5. Nayak Anti-arguments
4. T2: FM wants 52% shareholding in banks
5. T3: Gopalkrishna Committee on Capacity building
1. Reform #1: Recruitment
2. Reform #2: Training
3. Reform #3: Staff-Transfer
6. Mock Questions
Combining three topics of current affairs 2014
May Week2: PJ Nayak Committee report
Sept. Week2: FM proposal for 52% shareholding in banks
Sept. Week4: RBI Gopalkrishna Committee report
T1: PJ Nayak Committee on Board governance
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Who is PJ Nayak?
Axis Bank, Ex-Chairman.
Whats the purpose of his Committee?
RBI setup this Committee to review the governance of Board of Banks in India. (Published in May
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Gist of the matter?
1. In Sarkaari banks, Government owns >50% shares.
2. Therefore Government has majority voting power.
3. So, it can appoint (inefficient but ustaad-in-chamchaagiri) type people as board directors and
CMDs as per its own whims and fancies. Result: Scams like syndicate bank, and overall
4. Nayak says Government should transfer its shares to Bank investment Company (BIC), with
functional autonomy. (Then Government wont be able to appoint directors as per its own
whims and fancies) thus Sarkaari banks Governance will improve.
Gist of Nayak Committee recommendations
Reform #1: Repeal laws
Nayak recommends Government to repeal following laws
1. Bank nationalization Act (1970, 1980)
2. SBI Act, SBI subsidiaries Act
Because above acts require Government to keep shareholding >50%, and appoints CMDs and
board directors. Once these acts are repealed.
Reform #2: Bank Investment Company
Once those acts are repealed
Step1: Government should setup a Bank Investment Company (BIC), under Companies act,
2013. As a Core investment company.
Step2: Government should transfer its shares of Sarkaari banks, to BIC.
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Step3: Register all Sarkaari banks as subsidiary companies of BIC, under Companies act.
(Because now BIC owns >50% shares in those company, so BIC is the parent Holding
company and those banks became BICs subsidiary companies).
consequently all banks will become ltd. E.g. Punjab national bank=> Punjab national bank
1. BIC will have the voting powers to appoint Board of directors and other policy decision
during AGM of shareholders.
2. Government will sign an agreement with BIC, promising the autonomy. (that were majority
shareholders in BIC, but we wont interfere In your work- when you select directors, CMDs
for those subsidiary banks.)
3. This is not an entirely new concept. In UK, Government has setup UKFI (UK Financial
investment ltd.) for the same purpose.
Reform #3: Temporary BBB
When Bank investment company (BIC) will own >50% shares in those Sarkaari banks, itll
have the power to appoint Board of directors (And via them appoint the CMD).
But this requires repealing some acts = time consuming exercise because parliament
sessions are not held 24/7/365.
But, we cant wait that long, because Syndicate bank scam requires quick reform.
Therefore, Nayak recommends following temporary solution:
Until BIC is born, Government should setup a Bank Boards Bureau (BBB) at Mumbai.
This BBB will be madeup of Senior bankers. (3 members + 1 chairman; 3 years tenure)
Theyll advice on all board appointment, bank chairman/CMD and Executive directors.
Once BIC is setup, this BBB will be dissolved.
Misc. Reform #1: Age and tenure reforms

Figures not important, except for bank exams
category age limit
minimum age for CEO, CMD, directors etc. 21
upper age for CEO/CMD 65
upper age: whole time directors 65
upper age: part time directors 70

Figures not important, except for bank exams
category tenure limit
minimum 5 years
executive directors 3 years
part time directors 7 years
cooling off period between re-appointment at same bank 5 years
cooling off period between re-appointment at any bank 2 years
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Misc. Reform #2: Private shareholding
At present: an individual person/Mutual fund etc. cannot own more than 5% shares in a
Sarkaari bank. (At maximum 10%- after RBI permission).
Nayak proposes following reforms:
Increase the shareholding limits (figures not important)
shareholding in bank
all financial institutions upto 10%
New category: Authorised Bank Investors (ABI). Itll include pension
funds, mutual funds, ETF etc. approved by RBI
15% if he is
board member
20% if he is not a
board member
Nayak Pro arguments
Nayak recommendations should be adopted because:
#1: competitiveness
Private bank Sarkaari bank
chairmans pay packages linked with bank profit.
Hence hell always focused on raising customer
base, telemarketing, advertisement, trying to sell
maximum loans and so on.
Chairmans pay not linked with
He is appointed not for his talent
but because he is in the good
books of Government.
He is not as blood-thirsty for
profit, like a private banks
#2: CVC-CAG-Risk aversion
Private banks: only RBI supervision. They dont fall under purview of CVC-CAG-RTI.
Sarkaari banks: Since Government holds >50%, these Sarkaari banks are also answerable
to RTI, CVC and CAG, apart from RBI.
Consequently, senior bankers become cautious. They avoid taking bold- business decisions.
All decisions taken by Committee mindset to dodge responsibility. Hence Sarkaari banks
dont make large profit.
So, it is necessary to liberate them from clutches of CVC-CAG-RTI.
Therefore, Nayaks recommendation should be implemented- Government should reduce its
shareholding to below 50% (by transferring shares to BIC and signing an autonomy
#3: Fiscal repression and Profitability
private banks Sarkaari banks
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They reinvest profit in branch
expansion, advertisement etc.
They do not invest profit in G-sec.
(except for SLR requirements)
Because G-Sec pays ~8% return, so
better invest the money in any other
activity thatd bring more than 8%
They invest profit in G-sec. (Government
Because Government control their board of
so, Government indirectly forces bank to
purchase its G-sec (so that they can run
more schemes named after you know who)
Same is done with LIC, EPFO and other
institutions, where Government is majority
Economic survey calls this phenomenon
fiscal repression.
Consequence: these institutions never make
large profit because they always make
safe-investment in G-sec.
To stop this nuisance of fiscal repression, it is necessary that Government holds <50% shares in
any Banks.
#4: Bailouts
1. Earlier, Government had forced Sarkaari banks to use their money to bailout loss making
2. Sarkaari banks forced to give cheap loans to FCI, so that FCI can purchase foodgrains at a
high Minimum support price (MSP)- to keep the farmer-votebank happy.
3. Sarkaari banks forced to waive debts of farmers before election.
While all this may sound good to votebank and socialism but in the long term it harms the system
at large.
1. UTI-IDBI became complacent that even if we mismanage, theyll bail us out. (Same goes
with AirIndia).
2. Farmers dont cultivate pulses, oilseeds or vegetables. But only wheat and rice because FCI
is paying them large MSP. Result: veggie-shortage and food inflation.
3. Farmers dont repay loans on time, hoping Government will waive their debts just before
Again, to stop such nuisance, it is necessary that Government holds <50% shares in any Banks.
Nayak Anti-arguments
that Nayak recommendations must not be implemented AND Government must continue holding
>50% shareholding in the Sarkaari banks because
Subprime crisis, LIBOR scam, Global financial meltdown: all this happened because of
MNC-Banks and financial conglomerates outside Government control.
Only 40,000 out of 6 lakh villages, have bank branches. If Nayak recommendations accepted
then all banks will run only with profit-motive, no one will setup branches in villages. Then,
financial inclusion cant be achieved.
Counter argument: RBI rule requires all banks to setup 25% of branches in rural areas
If CVC-CAG oversight is gone, it is possible these banks will connive with corporate
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borrowers and money laundering. (Recall the cobra post sting on ICICI etc. private banks)
T2: FM wants 52% shareholding in banks
As per the Bank nationalization acts, Government shareholding must not fall below 51% in
Sarkaari (Public sector) banks.
Some Examples:
Sarkaari Bank Government shareholding
BoB 56.26%
Central Bank of India 88.63%
SBI 58.60%
PNB 58.87%
So whats new?
Government decided- its minimum shareholding in any public sector bank, must not
fall below 58%
Finance ministry has sent a proposal to cabinet- to reduce shareholding to 52%.
1. Government gets money by selling excess shares=helps filling up the fiscal
deficit pothole.
2. Government may give back that money to Sarkaari banks as capital to meet
the capital requirements BASEL-3 norms.
T3: Gopalkrishna Committee on Capacity building
Who is G.Gopalkrishna?
Earlier he was Executive director of RBI. HE couldnt get promotion to Dy.Governor post, so
Whats Purpose of his Committee?
RBI setup this Committee for Capacity building in banks and non-banks.
Gist of the matter?
PJ Nayak= improve efficiency via reforms in Government shareholding and board of
But what about reforms at field level? What about transparency-bank loan scandals, issues
in recruitment-transfer-appointment process?
Therefore, Rajanbhai had appointed G.Gopalkrishna Committee
Sep 2014: Committee submitted report
Dec 2014: likely to be implemented.
Lets check its major recommendations:
Reform #1: Recruitment
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Common Bank aptitude test (BAT)
Should be conducted online
BAT score should be used for for entry-level recruitments in banks.
Reform #2: Training
Each bank should have a chief leaning officer. Hell provide coaching-mentoring in
leadership Development.
Top management in public sector banks are close to retirement and risk-averse. These banks
need younger people, lateral entry and diversification
NIBM, IIBF, CAFRAL etc. should provide specialized training for foreign exchange rules,
treasury Management, online security etc.
Banks should send staff to deputation in institutes, or even abroad- to enhance their skills.
Reform #3: Staff-Transfer
in Sarkaari banks there is shortage of manpower at mid-executive level because talented
officers leave to join private banks and NBFCs.
Syndicate bank loan scam.
Ex-CJI Sathasivam also complained the same- short tenure not sufficient to bring large scale
reforms- in judiciary.
In this backdrop, bank-transfer policy indeed needs to be revamped. Gopalkrishna recommends
Bank should not transfer staff in a mechanical manner.
Transfer should be done to provide good leaders across geography.
Posts that have high concentration of power- the transfer should be done on need-basis
rather putting fixed-terms on it.
You can read the entire report on RBI official site click me. Truckload of fodder for bank
interviews and group discussion.
Mock Questions
1. Match the following- Committee names on one side and purpose on the other side.
2. List of recommendations given by xyz Committee. Then youve to figure out which
statements are correct- only 1 and 2, only 1,2 and 4
Civil service Mains exam
For UPSC mains, PJ Nayak important, but Gopalkrishna may be ignored.
1. Write a note on the recommendations of PJ Nayak Committee. (they asked similar question
about Damodaran Committee few years back)
2. To make public sector banks competitive and profitable, there is a need to revamp its board
governance. Examine the recommendations of PJ Nayak Committee in this regard.
3. Discuss the arguments made in favor and against the reducing of Government shareholding
in public sector banks.
Interview/ GD
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1. Argument in favor and against reducing Government shareholding?
2. What steps are necessary to make public sector banks be made as profitable and competitive
as private sector banks?
3. (Bank-interview) Suggest manpower and HR reforms in public sector banks.

Published on 13/10/2014 @ 7:29 pm under Category: Economy
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