Govt keen to retain its say on picking PSB independent directors

The central government is not in favour of allowing public sector banks (PSBs) to appoint their own independent directors, said a senior official, arguing that retaining control is essential to ensure consistent oversight and to effectively implement financial inclusion schemes. 

During the PSB Manthan earlier this month, some experts and bankers had suggested that the power to appoint independent directors should rest with the boards of PSBs to enhance accountability. 

“This is not feasible, and the government is not in favour of it. As the promoter, we are required to make such appointments, similar to the practice followed in private sector entities. This is also required to effectively implement financial inclusion schemes,” the official said. 

The source further said that already the managing directors and chairman of PSBs are being appointed by the government.

In May 2014, the P J Nayak Committee, appointed by the Reserve Bank of India to review governance of bank boards, recommended that the boards of PSBs be allowed to appoint non-official directors (NODs). 

Non-board directors in PSBs typically include government-nominated directors, RBI-nominated directors, independent directors, and shareholder-elected directors. These are non-executive roles on the bank’s board, and they play a key part in governance, oversight, risk management, and representing stakeholders. They are expected to bring professional expertise, ensure regulatory compliance, and provide independent judgement on bank policies and decisions. Though not involved in daily operations, their presence is crucial for maintaining transparency and accountability. 

Currently, the Department of Financial Services in the finance ministry selects NODs for PSBs. An email query sent to the finance ministry remained unanswered at the time of going to press.  

Unlike private sector peers, PSBs do not possess the independence to appoint NODs, who have a non-executive role, based on their requirements and following a “fit-and-proper criteria” of their own. Instead, the government searches and selects NODs for state-owned banks without the need for consent from the latter. 

The Nayak Committee had highlighted how the top management of banks has no say in the appointment of non-executive directors. “The probability that this will lead to a constructive board dynamic, wherein the chairman (or the MD and CEO) senses complementary skills on the board and benefits from the advice of the board, must be assessed,” the panel had said in its report. 

The Union government in March this year, in the Lok Sabha, said that approximately 42 per cent of director positions were vacant across the boards of all 12 PSBs. “The government takes all the required action to fill up the vacancies at the earliest possible,” said Pankaj Chaudhary, minister of state for the Ministry of Finance, in a written reply.