State-owned banks want govt to give up control

Gyan Sangam blueprint suggests empowerment on boards, on the lines of Nayak panel suggestions; govt to take decision shortly

In what could be a watershed moment for the Indian banking sector, public sector banks (PSBs) have suggested the government cut its stake in these entities to less than 51 per cent over a period of time and empower the boards of individual banks.

During the two-day Gyan Sangam, aimed at identifying steps to kick-start long-pending reforms in the banking sector, bankers told the government PSBs needed to shift from being state-owned to state-linked.

On its part, the government said it would consider the suggestions and take a decision on the matter soon. “Banks have to be given sufficient amount of leeway to deal with commercial issues with a commercial mindset…There is a need for bringing greater autonomy into them,” said Finance Minister Arun Jaitley. “There are a series of steps the government has taken and now, there is a need for the banking system in India to finance infrastructure and infuse liquidity in a big way.”

In a nutshell, bankers suggested the government adopt the recommendations of the PJ Nayak committee, set up by Reserve Bank of India (RBI) Governor Raghuram Rajan to improve governance in PSBs. The Nayak committee had said for a healthy banking system, the government should give up its control in PSBs.

While government stake reduction has been envisaged in the long run (after a period of two years), it has been proposed a ‘bank bureau’ be set up in the interim to support the creation of independent, high-performing boards.

Also on the cards is a bank investment company, in line with the Nayak committee’s proposals, which will help the government cut its stake in PSBs.

According to the blueprint presented to the prime minister, who attended the concluding session on Saturday, banks have identified measures they have to implement, as well as another set of steps the government should take.

Banks have agreed they need to reorient their portfolios, particularly smaller ones, so that they can focus on niche areas to build capabilities and optimise capital. They have sought the government’s interference in their affairs be minimal, which the prime minister and the finance minister acknowledged. Banks also requested market distortions such as debt waivers and interest rate caps be done away with, and sought a stronger legal framework.

On the issue of consolidation, another important point of discussion at the two-day retreat, the finance ministry has said proposals in this regard should come from the banks concerned. Hasmukh Adhia, secretary in the Department of Financial Services, said while decisions in this field should be taken by banks, the government would sensitise banks about such needs, given the country needed large banks to support infrastructure development.

Adhia said the prime minister had, during his address to banks, emphasised the need for size and scale of Indian banks.

The government and the central bank have also agreed on the need to shore up banks’ capital base. “The capital base of banks might need to be enhanced,” a finance ministry release said, quoting RBI Governor Rajan.

Rajan also stressed the need to consolidate ownership and improve in governance. “PSBs need to recruit young talent, train and retain them. And, the government needs to re-look at campus recruitment, currently banned because of a Supreme Court ruling,” he said.