Centre may empower public sector banks to induct non-executive directors

Right now, the Department of Financial Services in the finance ministry selects NODs for PSBs (one is a ‘government nominee’, the other is a ‘chartered accountant director’) | Illustration: Binay Sinha
The government is working on a plan to empower state-owned banks to appoint their own independent directors, along with a slew of other governance reforms.

Governance reform in public sector banks (PSBs) was one of the key issues deliberated on at a meeting chaired by Prime Minister Narendra Modi with chief executives of private and state-owned banks, along with a few non-banking financial companies, on August 5.

The government is looking to bring to light some of the recommendations of the P J Nayak Committee, which had submitted its report in May 2014, a person who attended the meeting with the PM said. The committee was appointed by the Reserve Bank of India to review governance of bank boards.

One of the measures being considered is to allow the boards of PSBs to appoint non-official directors (NODs), the person quoted above said.  Right now, the Department of Financial Services in the finance ministry selects NODs for PSBs (one is a ‘government nominee’, the other is a ‘chartered accountant director’).

Unlike private sector peers, PSBs do not possess the independence to appoint NODs, who have a non-executive role, based on their requirements and following a “fit-and-proper criteria” of their own.

Instead, the government searches and selects NODs for state-owned banks without the need for consent from the latter.

Apart from elected shareholder directors, PSB boards have little say in choosing directors. 

“In state-owned banks, the shareholder (or the government) is so powerful that the board has limited remit and in private banks, the chief executive officer (CEO) is so powerful that the board or its shareholders have limited say. So, we have to find a golden mean between these two,” former managing director (MD) and chief executive officer (CEO) of erstwhile Syndicate Bank Mrutyunjay Mahapatra said. He added that though the government consults the bank management while appointing the directors at times, the boards can choose the directors based on immediate goals of the bank, if given the power.

The Nayak Committee had highlighted how the top management of banks has no say in the appointment of non-executive directors since the government plays a key role there.

“The probability that this will lead to a constructive board dynamic, wherein the chairman (or the MD and CEO) senses complementary skills on the board and benefits from the advice of the board, must be assessed,” the committee had said in its report.

The panel had envisaged strengthening the PSB boards in three phases. In the first phase, Banks Board Bureau (BBB) would advise on all board appointments for three years, followed by formation of a holding company for banks that will take over that role in the second phase, in the third phase, PSB boards would select their top management. While whole-time directors are appointed based on the recommendations of the BBB set up in 2016, non-executive directors are government appointees and the BBB has no say in it. In fact, the finance ministry was not in favour of delegating this power to the BBB in 2016.

Last year in August, the finance ministry had decided to “enhance the effectiveness of non-official directors” by allowing them to perform roles akin to independent directors, along with empowering bank boards to enhance the sitting fees of NODs. The boards were also allowed to evaluate the performance of NODs annually on a peer-review basis.

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