Bank Nationalisation Act primitive today: P J Nayak

MUMBAI: The Bank Nationalisation Act of 1969 is too primitive and irrelevant to cope with the needs of corporate governance, according to P J Nayak, chairman of the panel constituted by the Reserve Bank of India to review governance in bank boards. The new government that takes charge at the Centre in the next few days will have to decide whether to discard the four-decade-old law introduced by Indira Gandhi as recommended by the panel.

Speaking to TOI on the thinking behind the panel's recommendations, Nayak said, "The Bank Nationalisation Act of 1969 was necessary at that time and its enactment was for government ownership of the banks. But 45 years after the Act was promulgated, it is important for us to ask if this is the best legislative structure under which the banks should now function. For a long time, we had an unreformed Companies Act, but in 2013 we got the new Companies Act which creates good governance structure at the level of the board."

According to Nayak, one of the perspectives that guided the panel was that there should be only one kind of bank licence irrespective of ownership and all banks should come under the Companies Act. "The Companies Act provides a much more relevant way of governing banks than the Bank Nationalisation Act as a whole. In fact, in comparison the Bank Nationalisation Act appears irrelevant today, almost primitive. It (Bank Nationalisation Act) was not created to govern banks; it was introduced only to take them over. The time has come to move all the banks under a company law responsibility framework and this is easily done if the legislation that we are proposing is introduced," said Nayak.

For the UPA government, undoing the Bank Nationalisation Act was seen as a taboo. It marked the emergence of Indira Gandhi as a strong leader in the Congress. It was also the early indicator of the left-of-centre ideology that was shaping up under the Congress. In his 2009 Budget speech, former finance minister Pranab Mukherjee had hailed the legislation. "Never before has Indira Gandhi's bold decision to nationalize our banking system exactly 40 years ago - on July 14, 1969 - appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector." His successor P Chidmbaram also categorically denied any plans to reduce government stake in public sector banks.

Nayak said that the panel's recommendation was aimed at full empowerment of the boards of public sector banks. Besides recommending a free hand to bank boards, it also seeks to bring in accountability by suggesting that there should be rollback of bonuses if banks are found to be hiding bad loans through "evergreening".

"In theory, there is an incentive for banks to evergreen and it is important that they do not do so and if they are caught doing so, the people who benefit from this should effectively not be permitted to benefit," said Nayak.