The Reserve Bank of India formed the PJ Nayak Committee to give recommendations on improving the governance mechanism of the bank boards in India. This committee is also known as the “Committee to Review Governance of Boards of Banks” in India. It was formed in 2014 and was headed by the former CEO and chairman of the Axis Bank, PJ Nayak. 

The PJ Nayak Committee gave many recommendations which helped to significantly improve the level of governance on the bank boards of various banks in India. Therefore, the PJ Nayak Committee is one of the most important topics for the UPSC IAS Examination.

In this article on the PJ Nayak Committee, we shall discuss its objectives, recommendations & significance. This will be very useful for aspirants in the UPSC Prelims Exam.

PJ Nayak Committee (UPSC Polity): Download PDF Here!

Objectives of the PJ Nayak Committee

The PJ Nayak Committee was formed in 2014 by the Reserve Bank of India (RBI). Its main objective was to examine the governance of the bank boards of the Indian public sector banks (PSBs). Some of its other objectives include:

• Studying the structure of the board of directors and the composition of board committees of PSBs. 
  • Suggesting improvements to enhance their efficiency and governance.
• Recommending measures to strengthen the accountability of the bank boards to stakeholders. 
• Reviewing the existing appointment process of board members, including independent directors. 
  • Recommending measures to improve the process and ensure the selection of suitable candidates.
• Recommending measures to enhance the quality of deliberations and decision-making by the board of directors.
• Giving recommendations to RBI to improve the regulatory rules related to the ownership of banks.
• Examining the adequacy of training programs for board members and recommending improvements.

Study the NCERT Notes on Types of Writs in India here.

Recommendations of the PJ Nayak Committee

The PJ Nayak Committee made several recommendations to improve the functioning of public sector banks (PSBs) in India. These recommendations are as follows:

• Repeal certain acts like the SBI Subsidiaries Act, the SBI Act and the Bank Nationalisation Act of 1970 and 1980.
• Form a Bank Investment Company (BIC) in the form of a core investment company or a holding company. 
  • The government should transfer its shares in the banks to the BIC.
  • Make the BIC the parent organisation holding the shares of all the national banks. By this, these PSBs will become the subsidiaries of this BIC.
  • Ensure that these public sector banks, which were till now under the direct control of the government, become ‘Limited Banks.’
• Being an independent organisation, the BIC will have the authority for the following: 
  • recruiting the board of directors in PSBs and 
  • undertaking other policy decisions in PSBs.
• Constitute a ‘Bank Board Bureau’ (BBB) to undertake the functions of the BIC till the time it is formed.
  • BBB will give recommendations on the appointment of the Bank’s Chairman and other Executive Directors to the board.
• Linking the chairman's pay to profits is likely to incentivize the focus on marketing and improving the customer base. This can improve the performance of the banks.

Study the NCERT Notes on the Attorney General of India here.

Arguments that Favour the Recommendations

The following arguments are in favour of the recommendations of the P J Nayak Committee:

• Linking the chairman's pay to profits is likely to incentivize the focus on marketing and improving the customer base. This can improve the performance of the banks.
• Banks being under only RBI supervision and not the CVC, RTI, and CAG would make them more amenable to taking calculated risks. This may not be possible under strict government scrutiny. 
• National banks usually invest their profits in government securities only. This limits their potential for higher profits. 
  • The government owns majority shares in them and indirectly controls where they invest. This is also called ‘fiscal repression.’ 
  • Private banks invest in securities with higher returns. Hence, they can help nationalized banks to improve their returns and profitability. 
• The government bailout of loss-making entities such as UTI and IDBI could be a drain on the resources of nationalized banks. 
  • Removing this obligation frees up resources for better utilization and improving bank performance.
• Nationalized banks were also compelled to give cheap loans to FCI and waive off farmers' debts. This may not be financially viable for the banks. 
  • The recommendations can bring more financial independence to the decision-making process of the banks.

Also, study the NCERT Notes on Fundamental Duties in India from the linked article.

Arguments that are Against the Recommendations

The following arguments are against the recommendations of the P J Nayak Committee:

• Critics argue that reducing the government's share in banks to below 51% will make banks solely profit-driven. This could harm financial inclusion in rural areas where access to banking services is limited.
• Removing the oversight of bodies like the CAG and CVC could increase the possibility of fraud in banks.

Study the Article on UPSC Polity Strategy here.

Significance of the PJ Nayak Committee

• As the government is the main owner of the public sector banks, because it holds more than 50% of shares in these banks.
• So, before the constitution of the PJ Nayak committee, the government had the full authority to decide on the appointment of the Chairman and other executive directors in the boards of the banks.
• Sometimes, this would lead to the appointment of some inefficient people who were not based on merit to be appointed as the directors or other executive position holders in the boards of the banks.
• This would then leads to certain scams like the Syndicate Bank scam and the Punjab National Bank scam.
• The formation of the Bank Board Bureau under the recommendations of the PJ Nayak committee has necessitated that the decisions on the appointment of the Chairman and other executive directors in the boards of these public sector banks are taken by an autonomous organisation.
• And this autonomous organization gives prime importance to the merit of the appointed people which, thereby helps to improve the governance of these Public Sector Banks (PSBs).

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We hope that all your doubts regarding the PJ Nayak Committee will be cleared after going through this article. You can download the Testbook App now to check out various other topics relevant to the UPSC IAS Exam.

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