More public sector bank reforms soon

Setting up of Bank Boards Bureau, non-official director appointment next in agenda

After splitting the post of chairman and managing director (CMD) — the appointment process for which is underway — the finance ministry is gearing up for more reforms in public sector banks (PSBs).

Next in line could be the formation of the Bank Boards Bureau (BBB), which will be set up to advise on all board-level appointments, including executive directors. The formation of the BBB is a crucial step along the reform path since the government will then stop appointing any director to the board of banks. Till now, all directors, except three independent directors, are appointed by the government.

The P J Nayak committee on the governance structure of bank boards had highlighted the need for setting up a BBB until the Bank Investment Company (BIC) is set up. BIC is an omnibus holding company, as suggested by the committee, to which banks will transfer the government’s stake.

According to the Nayak committee recommendations, BBB could be set up by an executive order of the government. The BBB should have three members, including its chairman, who are  retired bankers.

“They (BBB members) would be bankers of high standing and the government should select them in consultation with RBI (Reserve Bank of India). Where selections to top bank managements are proposed by BBB but not accepted by the government, BBB will make a public disclosure,” the Nayak committee had said.

The panel suggested that the maximum tenure of BBB members be of three years which should not be renewed to ensure BBB’s autonomy and independence are not compromised. Their remuneration would be at least that of existing PSB chairmen.

The government is also in the process of appointing professional non-official directors on bank boards for which applications have been invited from candidates with at least 20 years of experience from various fields like corporate law, risk management and rural economy banking, among others. Preference will be given to candidates who have successfully led an organisation or if the person successfully turned around an organisation.

RBI had recently highlighted the seven areas which banks’ boards should deliberate on and dismantled the earlier system of “calendar of reviews”. The calendar of reviews comprised issues such as funds management, slippages and recovery of bad loans, state of preparedness in respect of major initiatives like know your customer (KYC), information technology, etc., among others.

This has been replaced by seven ‘critical themes’ — business strategy, risk, financial reports and their integrity, compliance, customer protection, financial inclusion and human resources.

While the government is taking several steps, in line with the Nayak committee recommendations, to reform PSBs, it is to be seen if it continues to holds majority stake in them. Reducing government stake below 51 per cent in PSBs was one of the critical suggestions of the committee. The government had indicated it was open to lowering its stake to 52 per cent but still wanted to hold controlling stake.

In the past six months, the government has taken steps to improve governance at PSB boards. The CMD post was split and MD & CEOs were appointed at many banks. The process of appointing non-executive chairman is currently underway. The government has also opened up the appointment of top positions in PSBs to private sector players, though that initiative has not been successful. In addition, the government has said it will not interfere in the day-to-day functioning of banks, a practice which had crippled the functioning of PSBs.