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Of strawberries and financial sector reforms

Of strawberries and financial sector reforms
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First Published: Wed, Feb 03 2010. 01 15 AM IST

Photo: Ramesh Pathania / Mint
Photo: Ramesh Pathania / Mint
Updated: Wed, Feb 03 2010. 11 01 AM IST
Mumbai: Like all berries, strawberries are extremely perishable. So great care is taken in their handling and storage. One should choose berries that are firm and plump with a shiny, deep red colour and attached green caps. When they are bought pre-packaged in a container, one needs to make sure that they are not packed too tight, which may crush and damage them.
Photo: Ramesh Pathania / Mint
Among vegetables, tomatoes perish fast. If they are not stored properly, they appear shrivelled and stale.
Strawberries and tomatoes do not last beyond four-five days. Everything, including tomato ketchup and cough syrup, has an expiry date but not the Indian government’s reform agenda.
Successive Union budgets have made many promises on reforms but very few of them have been kept. Some of the financial sector reform proposals are a decade old and the government’s record in implementing them is abysmal.
To begin with, paring the government’s stake in public sector banks is one issue that has featured in the wish list of successive finance ministers, but has not moved beyond that. Under the existing norms, the government’s stake in public sector banks cannot fall below 51%. In 2000, Yashwant Sinha, then finance minister of the Bharatiya Janata Party-led National Democratic Alliance government, made a state of intent to lower the government’s holding in public sector banks to 33%. The logic was impeccable: public sector banks should be owned in equal proportion by the government, the Indian public and foreign entities. The ultimate plan was to pare the government stake to 33% and raise the foreign ownership limit to the same level from 20%.
Indeed, government ownership is a great strength for the banking sector and this was proved in the latest crisis in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc. But the Indian government does not seem to have any choice other than paring its stake as it doesn’t have the money to keep the banks well capitalized. Banks need huge capital to meet the demand for loans in the world’s second fastest growing economy. If the government does not pare its stake, it will stunt the growth of banks, companies and the economy.
Currently, foreign ownership in public sector banks is capped at 20%, and for private banks, it’s 74%. Within the 74% limit, foreign direct investment cannot exceed 49%. Ditto in the case of portfolio investment. The 20% limit on foreign ownership in public sector banks doesn’t seem to make much sense as under corporate law, an investor needs at least a 26% stake to play a meaningful role in running a company. So, the government can raise it to at least 25%.
Foreign investment in Indian insurance companies is another contentious issue. Currently it is pegged at 26% and the government has promised to raise it to 49%. Here again, the rise in stake would not make any difference to the role of foreign investors as far as the management of the insurance firms is concerned, but higher foreign stakes will ensure higher capital infusion which they desperately need.
Another pending issue is the cap on voting rights in banks. Investors do not have voting rights in accordance with their holdings, and hence, any rise in the foreign holding pattern will not make any radical difference. Successive finance ministers have promised to lift the cap on voting rights, but nothing has happened so far. In private banks, voting rights are capped at 10% and in public sector banks at 1%.
One of the reasons could be the banking regulator’s lack of comfort with the idea as an overseas group may end up wielding more power by holding stakes through different firms. For instance, Temasek Holdings Pvt. Ltd and Government of Singapore Investment Corp. Pte Ltd are both government owned and if the cap on voting rights is lifted, together they can enjoy substantial power if they hold stakes in a bank. But I am sure this can be taken care of.
Both Sinha and Jaswant Singh, another former finance minister, announced the removal of the 10% cap on voting rights in private sector banks. P. Chidambaram, too, promised this in the 2005 Budget, but the necessary amendment to the Banking Regulation Act, 1949, is still awaited.
Instead of pushing for financial sector reforms, the government has traditionally been abusing the banking system by either forcing the public sector banks to dramatically raise their exposure to agriculture loans and giving small farm loans at a concessional rate or waiving stressed farm loans. One hopes that the trend will change for the better.
In fact, last year’s Economic Survey, presented ahead of the Union Budget, signalled a new beginning by making a strong pitch on raising voting rights in banks with equity holdings, lowering the government’s stake in public sector banks, increasing the foreign direct investment limit in Indian banks and allowing greater play to foreign banks among other things such as the creation of a corporate debt market and trade in derivatives. One hopes that at least some of these feature in this year’s Budget.
Along with larger play for foreign banks, the government can allow reputed industrial groups to float banks. Even credible microfinance institutions can be allowed to set up banks. This is not only to intensify competition but also to increase the banking coverage as about 50% of Indians still do not have access to banking facilities.
I am aware that the financial sector reforms agenda is not a tomato or strawberry and that the proposals shouldn’t have a short shelf life, but there is a limit to the extent they remain in circulation through statements of intent and inaction.
It is high time the finance minister set a time frame for all such issues. If the government cannot meet the deadline for their implementation, there is no point in keeping them alive to say all is well.
tamal.b@livemint.com
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First Published: Wed, Feb 03 2010. 01 15 AM IST