Date:17/11/2006 URL: http://www.thehindubusinessline.com/2006/11/17/stories/2006111700490800.htm

Back Freeing bank ownership

The ability of Indian banks to garner capital from non-government sources should be enhanced by dilution of state ownership, not by increasing it.

With all the systemic reforms in the financial sector over the past decade, one issue the Government is still tip-toeing around is that of ownership of public sector banks. To an extent that sensitivity is understandable given their critical role in the financial economy. Public sector banks account for 75 per cent of the business of all scheduled commercial banks. North Block's desire to control this dominant role may stem from the need to influence operations toward the more needy; from bank nationalisation to directed lending through loan melas, the Government has attempted to use ownership to fulfil its social agenda. But history highlights the failure of social engineering in financial inclusion; to date, more than 85 per cent of all bank business is concentrated in the urban areas. Directed lending has once again surfaced on the RBI's agenda for domestic and foreign banks but its outcome is predictable. So far, even the no-frills accounts that were to have taken financial services to the less developed areas have not materialised. Even while engaging in market-type reforms, policymakers seem to forget that banks are in business and that their operations can be more effectively influenced by incentives rather than the clout of ownership.

Against this backdrop, the Tarapore Committee II's nostrum for public sector bank ownership makes eminent sense, though the government and the public at large seem to have ignored this vital reform plan. This week in New Delhi, Mr S.S. Tarapore, the former deputy governor of the RBI, reiterated the Committee's view that the central bank should not transfer its stake of 59.73 per cent in State Bank of India to the government, a transfer provided for in the SBI Amendment Bill yet to be passed by Parliament. Since the basis of bank reforms lies in strengthening their capital base, and in the context of the Government's inability to provide the infusion levels required (think of fiscal responsibility!), any move to increase its ownership would only hamper the efforts of these banks at becoming globally competitive.

The current inclination in government to increase its stake in PSU banks is, therefore, inexplicable and needs to be reconsidered. If private Indian banks have fetched high valuations in the market, if they have been able to offer an array of services on a par with foreign banks, it is because they have been able to follow business practices based on their capacity to garner capital from non-government sources. The access to capital for public sector banks, limited till now, needs to be expanded by further dilution of state ownership, not by increasing it.