Bank Investment Company – UPSC GS3

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Context:
  • Government is planning to for a Bank Investment Company (BIC) to handle investment in PSBs.
What is Bank Investment Company (BIC):
  • BIC is envisaged to become a holding company for government’s share in PSBs. Its formation will ultimately transform all PSBs into BICs’ subsidiaries.
  • It was proposed by P J Nayak Committee (formed in 2014 by RBI)
P J Nayak Committee on BIC:
  • Committee was tasked with analysing the governance at public and private sector banks.
  • It analysed that recapitalisation will only incur fiscal costs without any return.
  • Thus, government can either opt for privatisation or complete reformation of bank governance.
  • In case of complete reformation of bank governance, a 3-step process is suggested:
    1. Government to disassociate from operations, management and governance of PSBs.
    2. Reconstitution of PSB board on professional lines.
    3. Transformation of BICs from an owner to an investor with an aim to protect the government’s financial investment in the banks by raising the returns.
  • Thus, BIC proposal is a right step towards PSB reforms. However, caution is required in formation of BIC as well.
Why government is looking to looking to form Bank Investment Company (BIC)?
  • As government is focussing on bank-led growth strategy, PSBs have a challenge to manage their balance sheet due to increasing NPAs.
  • But government is hesitant in assisting PSBs by capital infusion this time, because
  • Despite, capital infusion of nearly Rs 3.1 lakh crore from 2015-16 to 2019-20, PSBs have underperformed.
  • Their gross non-performing assets (GNPAs) is projected to increase to 16.2 per cent.
  • Thus, as per few reports’ government is planning to form Bank Investment Company (BIC) to consolidate government shareholding in PSBs. 
Suggestion for BIC formation
  • Independence of BIC:
    • BIC will need to be allowed to bring in the essential talent and expertise, and operate with freedom. In the absence of freedom, it will result into another reform like Banks Board Bureau (BBB);
    • BBB which was tasked with appointments and strategic decisions for PSBs is no more independent after inclusion of representatives from the RBI and the government.
  • Clear Goals needed: If capital raising is one of the goals, it need to maintain a proper portfolio of relatively better performing and non-performing banks to attract investments.
  • RBI Reservation: RBI also raised its reservation regarding BIC structure, as investors might face challenges in assessing relative risks, returns and performance of the banks.
Way forward
It is important that government deal with the challenges in formation of BICs in advance. Otherwise, privatisation can also be considered by repeal of the Bank Nationalisation Acts and the State Bank of India Act.
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