Mumbai: The telephone call from New Delhi is raising the hackles of public sector bankers.
They complain of frequent instructions from the finance ministry over the past few months on operational issues such as lending and pricing of loans, a trend that some bankers describe as a sign of growing micro-management by the government.
“The number of notes from the ministry has increased in the recent past, sometimes asking us to not to disburse unsecured short-term corporate loans or to give loans to a sector within a specific period,” said a top executive of a large state-run bank. He did not want to be named because of the sensitivity of the matter.
“They want us to improve business performance and the credit-deposit ratio, and at the same time influence business decisions through such directives. This is a concern,” the official said, adding that some of the directives were also related to the appointments of officers.
Mint’s Dinesh Unnikrishnan says public sector banks are experiencing a rise in interventions and instructions from the finance ministry
To be sure, the government is the largest shareholder in public sector banks and is empowered under banking regulations to intervene in policy matters, but the current wave of instructions has impacted the freedom of bank managements to take commercial decisions.
The ruling United Progressive Alliance is already under fire for such 1970s-style tinkering. In the case of Coal India Ltd, it has had to face a shareholder revolt led by hedge funds which allege that the government is forcing decisions that hurt minority shareholders. Others have pointed out that there has been growing pressure on independent institutions such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India.
The latest instance of micro-management was when the government wrote to banks asking them to give their balance sheets to their respective audit committees at least two days before the boards meet to finalize accounts.
The proposal, which followed a meeting between the chairmen of bank audit committees with the finance ministry, met with stiff resistance from some banks, with a few of them writing back to the government arguing against the proposal.
The banks argued that it is not prudent to disclose price-sensitive information of listed entities to the committees because of the risks that the numbers could be leaked to outsiders.
In a separate communication to the Indian Banks’ Association industry grouping, the ministry also proposed to give more powers to the audit committees, including a greater say in management functions.
This is of a piece with recent developments. In April, shortly after RBI cut interest rates, the ministry asked state-run banks to review lending rates, effectively forcing a host of them to immediately reduce rates.
Similarly, in August, public sector banks received a directive from the ministry to consider recasting the debt of micro, small and medium enterprises. Banks were asked to do this despite concerns that such a move could further add to the pile of bad loans to this category of borrowers.
“You have to live with it, as the Banking Act gives the government powers to intervene in the management of banks. The question of whether it is good or bad doesn’t arise,” the chairman of a south India-based government bank said.
None of the bankers Mint talked to were willing to be identified, fearing the wrath of the ministry.
The government is the majority owner of shares in public sector banks, which account for more than 75% of the Indian banking sector in terms of assets.
A senior finance ministry official denied the charge of micro-management, saying the interventions are confined to policy issues alone.
“The government interferes only in policy-related issues such as lending to economically weaker sections for their development. It is not true that the ministry does micro-management in public sector banks or interferes in their day-to-day operations,” the official said.
Another senior banking industry official, who also declined to be named, said such frequent directives operate against the spirit of a deregulated market.
“Many times such directives come in the way of Reserve Bank of India guidelines, be it KYC (know your customer) norms or for opening of accounts. Though the intention may be good, they do not do the consultation properly and the meetings are often conducted with the chief general managers or general managers, who will not dare to open their mouth against government bureaucrats. Hence, the conclusions of these meetings turn out to be diktats,” the banker said.
“Mostly it is a governance issue, which is contrary to the spirit of a free market economy, though I wouldn’t question the intention,” the banker added.
The silence of the banking regulator in this matter is also being questioned.
“If I were an industrial house and I were running the bank as the promoter of the bank, how would the regulator have responded to such interventions?” asked Viren H. Mehta, a partner at audit firm SR Batliboi and Co.
“On the other hand, if the government wants to effect some policy decisions through banking channels for economic development, one cannot question the intention. In any case, too much interference in the governance by promoters is not a healthy practice,” Mehta said.