1. P. J. Nayak Committee
Recommendations
Anshu Sindhu Vaibhav Shinde
Samarth Khare Jugal Solanki
Anand Baid Sayali Chodankar
Sameep Singh Satyaki Roy

2. Overview and Crux of Report
 Fragile position of public sector banks
 Compliance with regulatory capital by 2018
 Erosion of capital due to increasing rate of
stressed assets.
 Boards are disempowered and the selection
procedure is compromised
 To achieve govt. Objective of fiscal
consolidation

3.  Govt own interest to improve governance and
management.
 Weak board governance and less transparency
 High leverage makes banks a riskier
commercial activity
 External constraints like dual regulation
 Lack of professional and young people in top
management
 Govt. stake greater than 50% leads to
inefficiency

4.  Private sector bank related issues like
ownership constraints stipulated by RBI,
rigidity
 Sensitivity of loan asset portfolio affect final
reporting
 More clarity of work and power in case of old
private sector banks
 Changing Market Structure in Indian Banking

5. Chapter 2 – The Changing Market
Structure in Indian Banking

6.  PSBs have lower profitability and productivity ratios; have
lost a significant market share and much weaker asset
quality then their private sector counterparts.
 Question - Do bank boards have the relevant domain skills,
strategic competence and independent thinking which
well-run organisations constantly strive for? Does the
relationship between the Government and its banks need to
be thought afresh?

7. Market Share

8. Profitability
• Return on assets
• Average NIM
• Net Profit Per Employee
• Staff Cost to Operating Expense
• Fee Income

9. Asset Ratio

10. Leverage Ratio

11. Capital Requirements

12. Stress Testing
 Scenario 1: No regulatory forbearance on restructured assets is
available and a 70 per cent provision cover is required
 Scenario 2: Regulatory forbearance is available in terms of RBI's
present norms for restructured assets, together with the need to
maintain a 70 per cent provision cover. Further, a 4.25 per cent
provision cover is maintained for restructured assets. It is also
projected in this scenario that 30% of outstanding restructured assets
would convert each year into NPAs.
 Scenario 3: Regulatory forbearance is available as before, and the
provision cover is lowered to 50 per cent. As in Scenario 2, a 4.25 per
cent provision cover is maintained for restructured assets and 30% of
restructured assets are projected to be converted into NPAs.

13. 3.80%
6.70%
8%
12.20%
12.90%
13.30%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Scenario 1 Scenario 2 Scenario 3
Public Sector
Private Sector

14.  Recommendation 2.1: Given the lower productivity, steep
erosion in asset quality and demonstrated uncompetitiveness of
public sector banks over varying time periods (as evidenced by
inferior financial parameters, accelerating stressed assets and
declining market share), the recapitalisation of these banks will
impose significant fiscal costs. If the governance of these
banks continues as at present, this will impede fiscal
consolidation, affect fiscal stability and eventually impinge on
the Government's solvency. Consequently, the Government
has two options: either to privatise these banks and allow their
future solvency to be subject to market competition, including
through mergers; or to design a radically new governance
structure for these banks which would better ensure their
ability to compete successfully, in order that repeated claims
for capital support from the Government, unconnected with
market returns, are avoided.

15. Chapter 3 – The Content of Board
Deliberation

16. Comparing Board Discussion in Public Sector
and Private Sector Banks

17.  Recommendation 3.1: There is a need to upgrade the quality of
board deliberation in public sector banks to provide greater
strategic focus. There are seven themes which appear critical to
their medium-term strengths comprising Business Strategy,
Financial Reports and their Integrity, Risk, Compliance, Customer
Protection, Financial Inclusion and Human Resources. All other
items for discussion should be brought to the Boards by exception
and should typically be discussed in committees of boards. Among
the seven themes identified for detailed board scrutiny, a
predominant emphasis needs to be provided to Business Strategy
and Risk.

18. Strategic vs. Tactical Focus
 Recommendation 3.2: As the quality of board
deliberation across firms is sensitive to the skills and
independence of board members, it is imperative to
upgrade these skills in boards of public sector banks by
reconfiguring the entire appointments process for boards.
Otherwise it is unlikely that these boards will be
empowered and effective. Specific recommendations for
this purpose are separately made in this report.

19. Calendar of Reviews
 Recommendation 3.3: The Calendar of Reviews needs either
to be revoked, or else to be freshly designed so as to ensure
that the time of the board is spent largely on the seven critical
themes listed in Recommendation 3.1, with specific attention
given to business strategy and risk management.

20. Control of Public Sector Banks
 Establishing fully empowered boards, solely
entrusted with the governance and oversight
of the management of the banks.
 Setting up a Bank Investment Company
(BIC) to hold equity stakes in banks which
are presently held by the Government.

21. Banking Investment Company
 BIC should be incorporated under the Companies
Act, as a core investment company under RBI
registration and regulation
 Transfer of powers from the Government to BIC
through a suitable shareholder agreement and
relevant MOA and AOA.
 Government and BIC should sign a shareholder
agreement which assures BIC of its autonomy and
sets its objective in terms of financial returns from
the banks it controls

22. Control of Public Sector Banks
(Cont.)
 The CEO and non-executive Chairman of BIC
would be nominated by the Government who
should be professional bankers.
 CEO to put together the BIC staff team who
would be incentivised based on the financial
returns
 No govt. interference to avoid dual regulations
 Govt. should not issue any instructions under
the pretext of development objectives.

23. Transfer of the Government
holding
in banks to BICPHASE -I
 Legislative amendments enacted to repeal the existing
Acts
 A professional board constituted for BIC.
 All existing ownership functions transferred from the
Government to BIC.
 All non-ownership functions, whether regulatory or
development nature, transferred from the Government
to RBI.
 BIC commences the process of professionalising and
empowering bank boards.

24. Phase-II
 The reconstitution of bank boards coordinated
by BIC.
 Bank ownership functions continued to be
executed by BIC.

25. PHASE-III
 All ownership functions and role of appointing
directors to be transferred by BIC to the bank boards.
 BIC to ensure the splits the position of the bank's
Chairman into a non-executive Chairman and a CEO.
 Strict compliance with Clause 49 of SEBI's Listing
Guidelines
 A lead independent director would be nominated for
each bank board.
 BIC responsibility - Protecting the Government's
financial investment in the banks, by raising the
financial returns to the Government.

26. Control of Public Sector Banks
(Cont.)
 Uniform license across all broad-based banks,
irrespective of ownership
 Investment limits also applicable for public
sector banks
 Making public sector banks competitive
 Reducing the proposed Bank Investment
Company's investment in a bank to less than
50 per cent will free the bank from external
vigilance.

27. Board Of Public Sector Banks
 Good Boards are essential….
Provide Divergent viewpoints
Effective Leadership
CEO succession
Heightened board governance…..Impacts
company performance Favorably
 Board issues with PSB’s……!!

28. Appointment Of Top Management
 Selection Committee:
 RBI Governor, Deputy Governor , Secretary
for Financial Services….Thorough Interviews.
 Actual Process:
 RBI Governor doesn’t’ attend
 Shortlisting done by department of financial
services….RBI unaware…Arbitrary Process.
 Room For Subjectivity….Short 5 min
interviews

29. Proposed Process
 Form BBB(Bank Boards Bureau)
3 Bankers- Retired Commercial Bankers
Choice to be made in consultation with
Government & RBI.
 For Transparency : All recommendations to
be made public.
Peer Scrutiny: Depoliticize & Professionalize
Max Tenure : 3 years

30. Need For Long Tenures
 Problem: Top Management have short tenures
 Solution:
Minimum 5 year tenure for Bank Chairman.
Minimum 3 year tenure for Executive
Director.
Better policies: Promote identification &
grooming of talent.
Young talent should be promoted.

31. Vigilance Enforcement
 Reluctance to handle credit.
 Deviation means culpability.
 Cases drag along….destroying careers.
Cases should be based upon
 Proof Of Wrongful gains or Evidence Of Self
Benefit.
 Deviation from laid down procedure should
not form sole basis of case.

32.  Recommendation 5.6: During Phase 1 of the
three-stage empowerment of bank boards
proposed in Chapter 4, the selection of non-
official directors should be entrusted to the
Bank Boards Bureau.
 Recommendation 5.7:Any director on the
board of a public sector bank will be eligible
to be a director on the boards of at most six
other listed companies.

33.  Recommendation 5.8: It is proposed that, from
the second phase, the maximum term for any
director other than whole-time directors be
restricted to seven years. Further, after any
tenure on a bank board, there would be a
cooling-off period of five years, for the director
to return to the same bank board, and a two-
year cooling-off period for the director to be
appointed on the board of any other bank.

34. Continuance of Talent: Succession
Planning
Clearances from CVC and Government
Anonymous complaints delay the procedure
Succession Planning a more composite Exercise
It is recommended that this clearance be
conducted only at the stage when candidates are
short-listed, and not resumed after the Selection
Committee recommends the candidate for
appointment.

35.  Recommendation 5.9: A partner or employee of
a firm auditing a bank would be conflicted in
becoming a director in another bank, in view of
the client information which auditors have
access to. Likewise, for such partner or
employee to be a director in the same bank
being audited would violate auditor
independence. Therefore, no such partner or
employee should be a director on the board of
any bank.

36. Contrasting Signals
 Private sector banks have large proportion of
independent directors as per stock exchange
listing requirements
 In PSBs, directors are nominated by
government.
 Private sector banks have to make “fit n
proper” assessment of directors, PSBs need not
do so.

37. Selection to PSB Board
 Bank Boards Beaureu (BBB), in consulation
with chairman, finalises the appointment
 5 years cooling period after 7 year term to return
to same bank board and 2 year term for any
other joining bank.
 Any director at a PSB eligible to sit on
maximum 6 other firms.
 No partner or employee of an auditing firm
should be on the board of the bank

38. Ownership Issues in Private Sector
Banks
 Ownership Regulation
 Changes in ownership regulation 2005( for
better governance)
 Tradition
 Fresh set of Regulation for issuing the banking
licences
 Highlight

39. Ownership Regulations in Other
Jurisdictions
 Indonesia
 25%
 More the 25% need a central bank approval
 Japan
 20% or 15
 Major stake holder need the central bank approval
 South korea
 4% can go up to 9% with central bank approval
 Fit & proper

40. Recommendation

41. 6.6 Listing of Banks
 Within a 3 years of commencing a business
, all Private banks should get listed
according to 2013 guidelines of RBI.
 Recommendation :-It would be inappropriate for
regulation to stipulate a period within which banks should
be listed, particularly from a governance perspective, as
premature listing could be injurious to minority
shareholders interest. It would therefore be desirable to
modify the 2013 guidelines accordingly.

42. 6.7 Capital for Distressed
Banks
 Recommendation:-For banks identified by RBI as
distressed, it is proposed that private equity funds,
including sovereign wealth funds, be permitted to take a
controlling stake of upto 40 percent.
 The principle of proportionate voting rights should
constitute part of the regulatory bedrock which fosters
good bank governance, as it aligns investors' powers in
shareholder meetings with the size of their shareholding.

43. 6.8 Entrepreneur-Led Banks
 Recommendation:-Where the principal
shareholder in an entrepreneur-led bank is
also the bank's CEO, RBI should satisfy
itself that the board is adequately
diversified and independent, with
professionals of high standing. Where RBI
lacks confidence of such independence, the
controlling shareholder should be asked to
step down as CEO.

44. Board of Private Sector Banks
Assessment of board governance in terms of
 Risk Management
 Competencies
Drawbacks
 Facilitating Ever greening of assets
 Not adequately Vigilant
A. Board
governance

45. Recommendation
Imposing penalties owing to Ever greening of assets
 Unvested stock options granted from senior officer to whole
time directors who indulged in ill practices, be cancelled in
part or full.
 Monetary bonuses should be clawed back
 Chairman of the audit committee asked to step down owing to
on vigilant
Role of National supervisors
 Paradigm shift in supervision from detailed to risk based
facilitate to conduct detailed checks on the reported quality of
bank’s assets portfolio, where compensation mechanism
through stock option is quite liberal.

46. Miss-selling
Third party Products: Life insurance & MFs products.
 Lack of grievances redressing committee for third party
products
 Miss-selling E.g.- Selling equity linked or ULIP to low
income/ pension holder- Aggressive Business goals- diluting
customer protection.
Recommendation
 Proper oversight of third party products considering customer
protection
 Positioning of the products with customers risk appetite,
demographics, income level etc.
 Proper explanation of product features

47. Board Compensation: Public vs.
Private
 Acc. Companies Act.- 1% of firms profit paid out as a
commission to board members except part time directors
compared to no remuneration in public sector banks.
 Inequality in Board compensation: In private sector banks
incentives like share of profits
Recommendation
 Profit based commissions for non-executive directors should
be permitted in but not before phase three of transaction
mechanism(Direct to indirect control- phases defines
government as sovereign to government as investors)

48. Age of Directors Acc. to Companies Act, 2013- Min is 21 and max is 70 ( later
can be exceed by shareholders through special resolution)
Private sectors bank:
 Min. Age-Directors is 35 ( RBI)
 Max age-Part time directors Min. age is 70
 No max. age for whole time directors
 For a bank CEO maximum age of 65 is proposed
 Incumbents of younger people in boards serving a long tenure.
Recommendation:
 The min and max age prescribed by companies Act, 2013 is
applicable to all directors of private sectors banks. For whole
time directors the maximum age would be 65

49. Board Governance: Old Private Sector Banks
Three elements of governance practice in community banks
 Promoter director- belong to founding promoter’s family-
shareholders support close to the family.
 Promoter director; deciding board composition and control
board decision
 Promoter director presence in committees like employee
promotion ( community biasedness), credit management
(act of gratification)
Result: Disempowering CEO, Mounting NPA owing to poor
credit management.

50. Recommendation
 For old private sector banks RBI doubt of community
influence on board, it mandate all director
appointments be made with prior approval of RBI. It
should be RBI endeavor to ensure adequate director
independence in board.
 If CEO has full control over the executive
management of the banks, it should assess the area of
interventions in bank committees, mandate a
separation between board oversight and executive
autonomy.