P J Nayak Committee

The P J Nayak Committee or officially the Committee to Review Governance of Boards of Banks in India was set up by the Reserve Bank of India (RBI) to review the governance of the board of banks in India. The Committee was set up in January 2014. The Committee was chaired by P J Nayak, the former CEO and Chairman of Axis Bank. Committees and commissions are important for the IAS Exam. Questions can either be asked in the IAS prelims or Mains GS-III.

P J Nayak Committee Objectives

1. To review the regulatory compliance requirements of boards of banks in the country to evaluate what can be rationalised and where requirements need to be enhanced.
2. To examine the workings of the boards of banks including if sufficient time is given to strategy issues, governance, growth and risk management.
3. To review RBI regulatory guidelines on bank ownership, ownership concentration and board concentration.
4. To study the compensation of the board.
5. To study the representation in the banks’ board, to check if the boards have the required mix of capabilities and the required independence to govern, and to inquire into possible conflict of interest in board representation.
6. To study any other issues pertinent to the functioning and governance of the boards of banks.

Why was the P J Nayak Committee set up?

In nationalised banks, the government owns more than 50% of the shares, which gives it the majority voting rights. Because of this, the government can interfere in the boards of such banks and appoint inefficient people to the boards. That is, the appointment of the members might not always be based on merit. This will lead to overall efficiency and scams such as the Syndicate Bank scam.

PJ Nayak Committee Recommendations

1. Repeal the Bank Nationalisation Act (1970, 1980), the SBI Act and the SBI Subsidiaries Act. This is because these acts require the government to have above 50% share in the banks.
2. After the above acts are repealed, the government should set up a Bank Investment Company (BIC) as a holding company or a core investment company.
3. The government to transfer its share in the banks to this BIC. Thus, the BIC would become the parent holding company of all these national banks, which would become subsidiaries. As a result of this, all the PSBs (public sector banks) would become ‘limited’ banks. BIC will be autonomous and have the power to appoint the Board of Directors and make other policy decisions.
4. Until the BIC is formed, a temporary body called the Bank Boards Bureau (BBB) will be formed to do the functions of the BIC. Once BIC is formed, the BBB will be dissolved.
5. The BBB will advise on appointments to the board, banks’ chairman and other executive directors.

Arguments in favour of the recommendations

• The chairman’s pay will be linked to profits. So, he/she will focus on marketing, improving customer base and advertisements.
• The banks will be under only RBI supervision and not the CVC, RTI and CAG. This will make the banks more amenable to taking calculated risks. In nationalised banks, because they are subject to supervision from CAG, RTI, etc. bold decisions are not taken by the management.
• Generally, national banks invest their profits in government securities only. Hence, they do not make huge profits because government securities are considered safe bets. This is also because the government owns majority shares in them which indirectly controls where they invest in. This is also called ‘fiscal repression’. This can be avoided because private banks invest in securities that give higher returns than G-secs.
• Nationalised banks could be forced to bailout loss-making entities (like the case with UTI and IDBI).
• Nationalised banks were also forced to give cheap loans to FCI and also waive off farmers’ debts.

Arguments against the recommendations

• Some people argue that lowering the government share to below 51% will make the banks only ‘profit-motive’. In India, financial inclusion in rural areas is less and if banks run only for profits, no branches will be set up in villages.
• When the oversight of the CAG and CVC are gone, there is a possibility of fraud.

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