Top recommendations of Report of the Committee to Review Governance of Boards of Banks in India

Indian public have a chance to provide their views on the ‘Report of the Committee to Review Governance of Boards of Banks in India (Chairman: Dr. P.J.Nayak)’, through email to, on or before June 12, 2014.


Reserve Bank of India had constituted an Expert Committee to Review Governance of Boards of Banks in India (Press Release dated January 20, 2014).

The Expert Committee was requested to examine, inter alia, the working of banks’ boards including whether adequate time is devoted to issues of strategy, growth, governance and risk management; to review central bank regulatory guidelines on bank ownership, ownership concentration and representation in the board; to analyse the representation on banks’ boards to see whether the boards have the appropriate mix of capabilities and the necessary independence to govern the institution, and to investigate possible conflicts of interest in board representation, including among owner representatives and regulators.

The lists of major recommendations of the committee are as under:-

Recommendation 2.1:- Two options for public sector banks i.e either to privatise these banks and allow their future solvency to be subject to including through mergers; or to design a radically new governance structure for these banks

Recommendation 2.2: – Removal of several external constraints imposed upon public sector banks which are inapplicable to their private sector competitors

Recommendation 3.1: – Need to upgrade the quality of board deliberation in public sector banks to provide greater strategic focus on 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

Recommendation 3.2: Upgrade the skills in boards of public sector banks by reconfiguring the entire appointments process for boards.

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.

Recommendation 4.1: The Government needs to move rapidly towards establishing fully empowered boards in public sector banks, solely entrusted with the governance and oversight of the management of the banks.

Recommendation 4.2: The Government should set up a Bank Investment Company (BIC) to hold equity stakes in banks which are presently held by the Government.

Recommendation 4.3: While the Bank Investment Company (BIC) would be constituted as a core investment company under RBI registration and regulation, the character of its business would make it resemble a passive sovereign wealth fund for the Government’s banks.

Recommendation 4.4: The CEO of the Bank Investment Company (BIC) would be tasked with putting together the BIC staff team. BIC employees would be incentivised based on the financial returns that the banks deliver

Recommendation 4.5: The Government should cease to issue any regulatory instructions applicable only to public sector banks. RBI should be the sole regulator for banks, with regulations continuing to be uniformly applicable to all commercial banks.

Recommendation 4.6: The Government should also cease to issue instructions to public sector banks in pursuit of development objectives. Any such instructions should, after consultation with RBI, be issued by a regulator and be applicable to all banks.

Recommendation 4.7: Three phase transition for  transfer of the Government holding in banks to the Bank Investment Company (BIC), as the transitioning of powers to bank boards with the intent of fully empowering them, needs to be implemented in phases.

Recommendation 4.8: Bank licensing regime to move to a uniform license across all broad-based banks, irrespective of ownership, subject to inter-jurisdictional reciprocity considerations in respect of foreign banks, and niche licenses for banks with more narrowly defined businesses.

Recommendation 4.9: Other than the Government’s own stake, which would be unconstrained, all other investment limits recommended in a separate  chapter for different categories of investors in private sector banks should also be applicable to investors in public sector banks.

Recommendation 4.10: Government to level the playing field for public sector banks in relation to their private sector competitors.

Recommendation 5.1: Setting up a Banks Boards Bureau (BBU). The BBU should comprise  three senior bankers chosen from among those who are either serving or retired Chairmen of banks, one of whom will be the Chairman of BBB.

Recommendation 5.2: The Chairman and each member of BBB should be given a maximum tenure of three years. There will be no renewal of their contract thereby ensuring that BBB’s autonomy and independence is not compromised.

Recommendation 5.3: There should be minimum five-year tenure for bank Chairmen and a minimum three year tenure for Executive Directors

Recommendation 5.4: Cases of vigilance enforcement against wholetime directors and other bank employees for decisions taken by them must be based on evidence that the director or employee personally made a wrongful gain

Recommendation 5.5 – In Phases 1-3, the selection process is initiated in good time to complete the appointments approval before the expiry of tenures of the incumbents.

Recommendation 5.8: 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.

Recommendation 5.9 A partner or an  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.

Recommendation 6.1: RBI should designate a specific category of investors in banks as Authorised Bank Investors (ABIs), defined to include all funds with diversified investors which are discretionally managed by fund managers and are deemed to be fit and proper.

Recommendation 6.2: A single ABI should be permitted a maximum 20 per cent investment stake in a bank without regulatory approval provided it possesses no right to appoint a board director

The rest of the recommendations can be read here.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s