What are the key recommendations of P J Nayak Committee report on governance problems in functioning of the Public Sector Banks? Critically assess these recommendations and possible implications of accepting them on Indian economy.

Public Sector Banks are in need of a complete reboot. PSBs comprise about 70% assets of the Indian Banking sector which necessitate introducing some quick reforms which are able to revive bank lending and private investment. A Panel headed by PJ Nayak who was ex-Chairman of Axis Bank suggested that governance in PSBs was ridden with constraints imposed on them externally largely due to dual regulations by the Ministry of Finance and RBI along with agencies like CVC, CAG etc. All these had accrued due to the government stakes in these banks more than 50%. Furthermore, the Bank Nationalisation Acts of 1970 and 1980 together with SBI Act and SBI (Subsidiary Banks) Act had further weakened the governance structures of PSBs.  
PSBs are faced with three prime issues viz.

  1. Governance: Board composition and functioning
  2. Management: CEO selection procedure
  3. Operations: The burgeoning NPA and capital infusion in the banks

The recommendations of PJ Nayak Committee and implications are as follows:

  • It had suggested separating the roles of chairman and managing director in a three-phase process. Later will give enough time to the PSBs for required autonomy and power to appoint the chairman and other directors. However, the government has taken steps to separate the roles of chairman and managing director (CMD) in all Public Sector Banks except in State Bank of India in one go as an initial measure. The Chairman will be selected by a panel which will be led by the governor of RBI.  Despite the move, there are possibilities of governmental influence to continue on the chairman after appointment which may come in conflict with the strategy of CEO and thus cripple the whole organisation. Thus, it was imperative to forward the separation of roles till the bank boards had effectively learnt to run under independent directors. 
  • The Panel had been gravely critical of the selection process of bank board and stated that the bank boards were not independent at all. The strengthening of bank boards has become even more important after the separation of roles stated above. In the same light, the government is deciding to set up Bank Boards Bureau comprising three former bankers, two distinguished professionals and Secretary of Department of Financial Services. Bank Chairmen, CEO and other independent directors will be selected by this Board.

The PSBs have been the best performing banks during the global financial crisis 2008 and were the reasons our economy was afloat in turbulent times. However, it has been the wrong governance criteria and policies along with the infrastructural funding which has left them behind.



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