Main Points Of Nayak Panel Report

List of Recommendations of Dr P.J. Nayak Panel Report 
( At the end of this , you may read action taken by union leaders of banks)
Several perspectives have guided the approach and recommendations of this Report:

• 1. The financial position of public sector banks is fragile, partly masked by regulatory forbearance. Forbearance delays, but does not extinguish, the recognition of this fragility. Capital is significantly eroded with the proportion of stressed assets rising rapidly. The Report projects, under different scenarios, the capital requirements till March 2018 in order that provisions are prudent, there is adequate balance sheet growth to support the needs of the economy, and capital is in line with the more demanding requirements of Basel 3.
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• 2. It is unclear that the boards of most of these banks have the required sense of purpose, in terms of their focus on business strategy and risk management, in being able to provide oversight to steer the banks through their present difficult position. The boards are disempowered, and the selection process for directors is increasingly compromised. Board governance is consequently weak.
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• 3. The onus of remedying this situation through radical reform lies primarily with the Central Government. In the absence of such reform, or if reform is piecemeal and non-substantive, it is unlikely that there will be material improvement in the governance of these banks. This could impede the Government's objective of fiscal consolidation. The fiscal cost of inadequate reform will therefore be steep.
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• 4. The high leverage that banks operate under makes banking a riskier commercial activity than most non-financial businesses. Unless banks are extremely well run and with a strong focus on financial returns, they tend to falter. The Central Government is a good example of a bank shareholder which has suffered deeply negative returns over decades. It is therefore in the Government's own interest to provide clarity in the objectives set for bank boards, and to thereby improve governance and management.
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• 5. The Report proposes that the Government distances itself from several bank governance functions which it presently discharges. For this purpose it recommends that the Bank Nationalisation Acts of 1970 and 1980, together with the SBI Act and the SBI (Subsidiary Banks) Act, be repealed, all banks be incorporated under the Companies Act, and a Bank Investment Company (BIC) be constituted to which the Government transfers its holdings in banks. The Government's powers in relation to the governance of banks should also be transferred to BIC.
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• 6. The process of board appointments, including appointments of whole-time directors, needs to be professionalised and a three-phase process is envisaged. In the first phase, until BIC becomes operational, a Bank Boards Bureau (BBB) comprising former senior bankers should advise on all board appointments, including those of Chairmen and Executive Directors. In the second phase this function would be undertaken by BIC, which would also actively strive to professionalise bank boards. In the third phase BIC would move several of its powers to the bank boards. The duration of this three-phase transition is expected to be between two and three years.
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• 7. Governance difficulties in public sector banks arise from several externally imposed constraints. These include dual regulation, by the Finance Ministry in addition to RBI; board constitution, wherein it is difficult to categorise any director as independent; significant and widening compensation differences with private sector banks, leading to the erosion of specialist skills; external vigilance enforcement though the CVC and CBI; and limited applicability of the RTI Act. A more level playing field with private sector banks is desirable.
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• 8. If the Government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures taken, all these external constraints would disappear. This would be a beneficial trade-off for the Government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully. It is a fundamental irony that presently the Government disadvantages the very banks it has invested in.
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• 9. The Report proposes the need for wide-ranging human resource policy changes. These would encompass getting younger people into top management, for which a demographic opportunity has now arisen, and which would thereby lead to longer tenures; and succession planning. There is also a need to envision afresh the process of countering corruption through a redesign of the existing process of vigilance enforcement. The Report argues that present modalities are damaging and erode the ability of the banks to compete strategically, besides being only weakly effective in combating corruption.
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• 10. Governance issues in private sector banks originate from an altogether different set of concerns. There are issues which arise from ownership constraints stipulated by RBI, which could misalign the interests of shareholders with those of the management. In several other jurisdictions, these constraints are less rigid. Rigidity keeps out certain kinds of investors and thereby reduces the pool of capital that banks could otherwise attract. When individual shareholdings are small, investors also tend to be more disengaged. Allowing larger block shareholders generally enhances governance.
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• 11. In order to permit certain kinds of investors to take larger stakes, it is proposed that a category of Authorised Bank Investors (ABIs) be created, comprising all diversified funds which are discretionally managed by fund managers and which are deemed fit and proper. It is proposed that an ABI be permitted a 20 per cent equity stake without regulatory approval, or 15 per cent if it also has a seat on the bank board. All other financial investors should be permitted upto 10 per cent.
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• 12. The shareholding permitted to promoters of banks is also tightly structured at present. Under the 2013 RBI guidelines, while such investors could begin with large stakes in banks, after some years they would need to reduce their stake and eventually can own no more than 15 per cent. The Report proposes increasing the continual stake ceiling to 25 per cent. It also proposes that for distressed banks, private equity funds - including sovereign wealth funds - be permitted to take a controlling stake of upto 40 per cent.
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• 13. The Report also proposes that the principle of proportionate voting rights should constitute part of the regulatory bedrock that fosters good governance.
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• 14. It is also necessary for boards to be vigilant about the quality of the loan asset portfolios as these sensitively affect the integrity of financial reporting. In private sector banks senior management is incentivised on the basis of bank profitability, and the compensation paid out - through stock options - is in substantial measure contingent on the stock price of the bank. There is a potential incentive to evergreen assets in order that provisions do not make a dent in profitability.
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• 15. With RBI also having moved away from detailed to risk-based supervision, the annual financial inspections investigate the asset quality reporting accuracy of banks less rigorously. It appears desirable therefore that RBI conducts random and detailed checks on asset quality in these banks.
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• 16. Wherever significant evergreening in a bank is detected by RBI, it is recommended that penalties be levied through cancellations of unvested stock options and claw-back of monetary bonuses on officers concerned and on all whole-time directors, and that the Chairman of the audit committee be asked to step down from the board.
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• 17. Boards should also define for third-party products what constitutes proper selling practices. Products need to be matched with customer demographics, customer income and wealth, and customer risk-appetite.
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• 18. Profit-based commissions for non-executive directors should be permitted in, but not before, Phase 3 of the transition process described in Observation 6 above.
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• 19. Old private sector banks typically began as community banks, although some have attempted to outgrow their historical origins and imitate the new private sector banks, bringing in diversified boards and broadbasing senior management. However, many other banks have management styles where the community hold remains intact, either tacit or explicit. The designation of a 'promoter director' then develops, who controls shareholder voting, the board and the employees. The CEO thereby becomes disempowered. RBI should attempt to diversify boards in banks where independence is not visible, by mandating prior RBI approval for directors in such banks. RBI should also mandate a separation between board oversight and executive autonomy.
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• 20. The Report also proposes details of legislation needed in order to implement its Recommendations.

Read Below action taken by trade union leaders

UCO BANK STAFF ASSOCIATION, RAJASTHAN
(Affiliated to A.I.B.E.A & A.I.U.C.B.E.F.)
State Office : UCO Bank Arya square, Subhash Nagar, Bani Park, Jaipur-302016
PH.No.(B),2282055,2283055 (Res.)2300381, (Fax)0141-2283808 Mob.9314505062
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Date : 17.05.2014

Dear Comrades,

We reproduce hereunder the text of Circular Letter No. 27/64/2014/20 dated 15.05.2014 issued by Com. C.H.Venkatachalam, General Secretary, All India Bank Employees' Association for information and further circulation.

With greetings,

Comradely yours,

(R.A. Sharma)
GENERAL SECRETARY
______________________________________________________________________________
RBI’s P J Nayak Committee recommends wholesale privatisation of Public Sector Banks
Rise in protest - UFBU’s call for demonstrations on 23rd May, 2014 all over the country

We have been consistently fighting against the banking reforms policy of the Government since the essence of the reforms is to hand over the Public Sector Banks to private hands. But they are never tired of their efforts to pursue their agenda. In January, 2014 RBI appointed a Committee as under:

Chairman : P J Nayak, former Chairman of Axis Bank

Members: S. Raman, former CMD of Canara Bank, Subhalakshmi Panse, former CMD of Allahabad Bank, Pratip Kar, Former ED, SEBI, Joydeep Sengupta, Director of McKinsey & Co., Harsh Vardhan, Partner, Bain & Co., Somasekar Sundaresan, Partner, J Sagar Associates and Krishnamurthy Subramanian, Asst. Professor, Indian School of Business from Hyderabad.

Issues like examining the regulatory compliance, ownership of banks, etc. were referred to this Committee.

This Nayak Committee has now submitted its Report to the RBI suggesting far-reaching reforms, some of which are as under:
• Privatise the Public Sector Banks
• Government’s capital should be reduce to less than 50 %
• Merger of Banks
• Design a new governance structure
• Better compensation for Chairman and EDs
• Keep PSBs out of CVC, RTI Act, etc.
• Bank Investment Company should be created under Companies Act which will control the Banks
• The CEO of BIC should be a private equity investment professional
• Ownership of Banks should be transferred to this BIC
• Government should not issue any regulatory instructions to Banks.
• Bank Nationalisation Act should be repealed and Banks should be covered by Companies Act.
• Ownership functions should be handed over by the Government to the BIC
• Government should not appoint any Directors in the Banks. BIC will do that.
• RBI Nominee Directors in the Banks should step down.
• Voting rights should be increased to 26 %

: 2 :

One can easily understand the game plan of the RBI. It is a wholesale attempt to hand over the Banks to private hands. It is nothing but an open effort to make the huge savings of the people available in the Banks for private looting. We have to fight back against this retrograde Report and its recommendations.

What our country needs is

Strengthening and expanding public sector banks
Bringing all private Banks under public Sector
Recover the bad loans from the private corporate and business houses.

Comrades, tough times are ahead of us. We have to fight back these attacks on public sector banking.

UFBU’s call - Hold massive demonstrations on 23rd May, 2014 :: UFBU has immediately expressed its strong protest against these recommendations and demanded the rejection of the Nayak Report. UFBU has called upon all unions and members to hold demonstration on 23rd May, 2014. UFBU’s press release is furnished herein. All our unions and members should move into action immediately and make the programme a success.

With greetings

,
Yours Comradely,

C.H. VENKATACHALAM
GENERAL SECRETARY

UNITED FORUM OF BANK UNIONS
(AIBEA-AIBOC-NCBE-AIBOA-BEFI-INBEF-INBOC-NOBW-NOBO)

PRESS RELEASE 15-5-2014
UFBU CONDEMNS NAYAK PANEL REPORT ON BANK PRIVATISATION – DEMANDS REJECTION OF REPORT
Our attention has been drawn to the report submitted by RBI’s P J Nayak Panel recommending privatization of public sector banks by reducing the Government’s equity capital in the banks to less than 51%. Ever since the major Banks in our country were nationalized in 1969, banking has been transformed from class banking to mass banking in our country. From mere 8239 branches in 1969, today there are more than 80,000 bank branches and nearly 36,000 of the branches being located in rural and semi-urban locations. From mere Rs. 5000 crores of Deposits in 1969, today Banks have mobilized more than Rs. 78 lac crores from the people as Deposits. Total advances of Rs. 3500 crores in 1969 has gone upto Rs. 50 lacs crores. Banking services are today accessible to common people only because the banks are in public sector. Sectors and areas like agriculture, rural development, employment generation, women empowerment, poverty alleviation, infrastructure development, etc. are given loan only because the Banks are in public Sector. Many private sector banks in our country have collapsed in the past due to mismanagement and cheating the people. Hence public sector banks should not be privatized. Rather they should be further strengthened and expanded. Given the bad track record of the private banks in our country, UFBU also demands that all private Banks should be nationalized and brought under public sector banking.

It is a sad commentary on the wisdom of this Committee that it has recommended banks to be handed over to private hands at a time when the bulk of the bad loans are attributable to the very same private sector. More than 4 lac crores of bad loans are due from these big private corporate and business enterprises. We strongly condemn the retrograde recommendations of the Nayak Committee and demand its outright rejection.
UFBU calls upon all the unions and members to organize demonstrations all over the country in all centres on 21-5-2014 after office hours. Further programmes will be given if the RBI/Government does not reject the Panel’s Report.
Sd.. M V Murali, Convener