As a first step to effect much-needed structural changes in the banking sector, the finance ministry and the Reserve Bank of India are discussing a proposal to create a holding company to which the equity of state-owned banks can be transferred. This was recommended by an RBI-appointed committee under P J Nayak, former Chairman and CEO, Axis Bank to review the governance of bank boards.
The committee had submitted its report to the RBI in May 2014. A separate holding company will help separate ownership and control in public sector banks and distance the government, the dominant shareholder, from their management. More importantly, it will also pave the way for making the boards more professional and enhance the banks’ efficiency and profitability.
The talks come when the government and the regulator are worried about the performance of public sector banks which have been weighed down by huge bad loans due to a slowing economy over the last couple of years. Gross non performing assets are now close to 4.5 per cent of total loans.
One option on the table is to float an apex holding company to which the entire equity of all state-owned banks is transferred, with the ownership functions (now with the government) being taken care of by the board. The Nayak committee had recommended a Bank Investment Company or BIC that will hold stakes in public sector banks. Given the challenges, especially political, in doing this, the other intermediate option is to float holding companies for each bank, two officials said.
Several concerns including overhang of bad loans, poor governance standards and the need for more capital infusion, seem to have prompted the government to hastily organise Gyan Sangam, a two-day retreat, with Prime Minister Narendra Modi himself addressing them on Saturday. Finance Minister Arun Jaitley, RBI Governor Raghuram Rajan and other senior officials from the finance ministry will be in attendance. The group is expected to finalise and submit a blue-print for reforms to the Prime Minister on Saturday.