P J Nayak Committee
Background
Public Sector Banks (PSBs) like SBI and PNB are owned by the government because of laws like the State Bank of India Act, 1955 and the Bank Nationalization Act, 1970. These laws require the government to have a majority share in these banks, meaning it can appoint their board members and control decisions.
However, this created problems:
- The government often appointed people based on political connections rather than banking expertise.
- Political interference led to bad decisions, corruption, and financial mismanagement.
To fix this, in January 2014, the P J Nayak Committee was formed to suggest ways to improve how public sector banks are governed. It submitted its report in May 2014.
Key Recommendations of the P J Nayak Committee
1. Creation of a Bank Investment Company (BIC)
- The government should set up BIC to hold its shares in all PSBs.
- Instead of the government directly owning PSBs, BIC would be the owner.
- PSBs would become limited companies (e.g., SBI → SBI Limited).
- If a bank goes bankrupt, the government wouldn't have to pay for its losses.
✅ Example: Imagine PSBs are like government-run schools, and the government directly controls their management. If something goes wrong, the government is responsible. But if an independent trust (BIC) takes over, it appoints the principal and teachers based on merit, reducing government interference.
2. Reduce Government Stake in PSBs Below 50%
- With less than 50% ownership, PSBs would have more autonomy.
- This would allow them to function like private banks, focusing on efficiency.
✅ Example: If a company (PSB) is run by a single owner (Government), it has full control, leading to favoritism and inefficiency. If multiple shareholders (private investors) own a larger share, decision-making improves.
3. Temporary Setup – Banks Board Bureau (BBB)
- Since making BIC would take time, a temporary Banks Board Bureau (BBB) should be set up to appoint bank directors and top management.
- BBB was later replaced by the Financial Services Institutions Bureau (FSIB) on July 1, 2022.
✅ Example: Think of BBB like an interim management committee before a full-fledged independent board (BIC) takes over.
What FSIB (Successor of BBB) Does?
FSIB helps in:
- Appointing Leaders – Recommends CEOs and chairpersons for PSBs, financial institutions (like NABARD, SIDBI), and insurance firms (like LIC).
- Advising the Government – On bank governance, performance evaluation, and management structure.
- Developing Strategies – Helps banks improve their business and capital plans.
✅ Example: Think of FSIB as a recruitment and policy advisory board that ensures only skilled and qualified professionals run public sector banks, reducing political interference.
Final Summary
The P J Nayak Committee was set up to reduce government interference in PSBs and improve their governance. It recommended:
- Creating BIC to hold government stakes and manage banks professionally.
- Reducing government shareholding in PSBs to below 50%.
- Setting up BBB (later replaced by FSIB) to select qualified bank leaders.
These reforms aim to make PSBs function like private banks, free from political interference, and focus on efficiency and profitability.