Why holding company structure for govt banks has a long way to go

The structure was mooted in 2012 to address the capital needs of banks

An omnibus holding company structure for public sector banks (PSBs) was mooted as early as 2012 by former finance minister, now president, Pranab Mukherjee in his Budget speech.

A lot of water has flown since and it took a power-packed panel headed by former Axis Bank chairman P J Nayak in 2014 to finally give it a shape. The committee was appointed by Reserve Bank of India (RBI) Governor Raghuram Rajan, who took charge in September 2013.

In 2012, the holding company structure was mooted to address the capital needs of banks. The Nayak committee broadened the concept to a Bank Investment Company (BIC), and linked it to governance of PSBs. “The government’s powers in relation to the governance of banks should also be transferred to BIC,” it had said.

In the first phase of PSB reform, until a BIC becomes operational, a bank boards bureau (BBB) comprising ex- senior bankers should advise on all board appointments, including those of chairmen and executive directors, the Nayak committee had said.

On Friday, though, the government said both the RBI and the government would have its representative on the BBB. The secretary, financial services, and a deputy governor of RBI will be on it, said Hasmukh Adhia, secretary, financial services, on Friday.

Experts said while the finance ministry’s announcement is a right step in the direction, formation of a BIC will take time. This is because a host of laws need to be passed. As the Nayak committee had proposed, the bank nationalisation Acts of 1970 and 1980, together with the State Bank of India Act and the SBI (Subsidiary Banks) Act, have to be repealed.

Second, all PSBs have to be incorporated under the Companies Act. Finally, a bank investment company will be formed, in which the government’s stake needs to be transferred. This will also need lawmakers’ approval. All this is at a time when the opposition is not allowing  Parliament to function. Important Bills like the one on a national goods and services tax are stuck.
 

The Nayak committee estimated 3 years for the entire reforms to take shape. Banking sector experts also do not foresee the holding company structure any time soon.

"The Bank Investment Company, which is the second phase of the reform path suggested by PJ Nayak committee will need to amend a host of laws. That will not happen overnight, but will take time," said a former PSB chairman. The function of the Bank Board Bureau will be undertaken by BIC in the second phase, the Nayak committee said.

In an interview to Business Standard earlier this week, R Gandhi, deputy governor in charge of banking regulation while saying that the government has in-principle agreed for setting up Bank Investment Company and Bank Board Bureau but added no time frame can be targeted for the BIC formation since it will need Parliament's approval.