Mumbai: The Indian government has quietly set the ball rolling for banking sector reforms by seeking bankers’ views on reducing its stake in public sector banks.
Under the law, government stake in these banks, which account for about 70% of the industry, cannot come down below 51%.
The management committee of the national bankers’ body met in Mumbai on Tuesday to discuss the issue.
A committee on financial sector reforms, headed by former Reserve Bank of India governor M. Narasimham, had in 1998 recommended bringing down the government’s stake to 33%. Since then, the issue has been discussed and debated at various fora, but successive coalition governments have not been able to move ahead with the proposal in the face of stiff political resistance from within as well as the parties in opposition.
The exit of the Left Front, ideologically against paring of government stake in banks, has seemingly emboldened the Congress-led Union government to push for it now, ahead of elections likely about eight months away. For more than four years, the Left Front was a key ally of the ruling United Progressive Alliance, or UPA, but it withdrew support to the government in early July over the Indo-US civilian nuclear deal. The government, which is in favour of this deal, then won a trust vote in Parliament.
Many hurdles might yet emerge for the Manmohan Singh government in its attempts to get the proposed reforms enacted, especially those requiring parliamentary approval. But, for now, the government is talking tough.
And, the previous Bharatiya Janata Party-led National Democratic Alliance government that was in power between 1999 and 2004 had promised to reduce the government’s stake in public sector banks to 33%. The BJP is now the UPA’s main opposition.
“We want the government’s stake to come down below 50% but we are not suggesting what should be its stake in these banks,” said IBA’s chief executive officer H.N. Sinor. The bankers’ body will formally send its views to the finance ministry on the politically sensitive issue by next week. “If the government does not want to bring down its stake and allow banks to raise capital from market, it will have to push for consolidation as there is no other way to meet the capital needs.”
“We do not know how fast it can be done, but we want to know from the industry why it is critical to bring down the government’s stake,” said a finance ministry official who did not wish to be named.
Barring two banks, the Kolkata-based United Bank of India and Delhi-based Punjab and Sind Bank, all other government-owned banks have raised money from the public and, in the process, brought down the government stake.
At least three of them have, in fact, brought down the government stake to very close to 51%. They are Oriental Bank of Commerce, Dena Bank and Andhra Bank.
There are seven others, including Punjab National Bank and Bank of Baroda, in which the government stake has come down to less than 60%.
According to the IBA estimate, these banks collectively need fresh capital worth Rs1.5 trillion in the next few years to support their credit growth. Besides, banks also need capital to take care of market risks under a new international norm, being implemented from this fiscal year ending March 2009.
“Unless the government’s stake comes down below 50%, how will these banks enter the market for capital?” asked Sinor of IBA . The other alternative before the government is to infuse fresh capital through a rights issue. However, after the State Bank of India’s experience, none of the banks is willing to take this route.
The government recently infused some Rs10,000 crore worth of capital in the country’s largest lender in form of bonds (it paid for its share of the rights issue with bonds) but the bank has had to book huge depreciation loss on these bonds as their prices fell with rising interest rates.
Banks are required to mark to market their bond portfolio every quarter—an accounting practice of valuing a bank’s investments in accordance with the current market price of securities and not at their historical value.
According to M.R. Umarji, chief legal adviser to IBA, under the Indian Constitution, government-owned banks will have to be equal-opportunity institutions and this limits their ability to reward talent. “They cannot hire talent from the market because they cannot offer market-related salary as that amounts to discrimination against existing employees. This severely dents their power to compete with private sector peers.”
The government had two years ago approved a scheme to offer bonus to the chairmen and executive directors of state-run banks. It also allowed banks to offer incentives to their employees but no bank can use more than 1% of its net profit for such incentives.
Unlike their peers in the private sector, public sector bankers come under the scanner of investigative agencies such as the Chief Vigilance Commission, or CVC, and the Central Bureau of Investigation, or CBI. “Banking is about risk taking. If every commercial decision that has led to a loss comes under the CVC or CBI scanner, bankers get demoralized. We can keep them out of the ambit of such agencies if the government stake comes down below 50%,” said Umarji.
Mint spoke to a few bank chairmen on this issue and most said government stake should come down to offer more operational freedom to them, but none would like to be named, given the sensitivity of the issue. “As long as the government holds 26% stake in banks, it should be fine as under the law that governs Indian firms, to pass any resolution one needs the support of at least 75% of stake holders,” said a bank CEO. This means that, with 26% holding, the government can block any resolution does not want passed.
“We would like banks to be corporatized,” said Sinor. In order to do this, the government needs to repeal the Banking Companies Acquisition and Transfer of Undertakings Act, 1970 and 1980, popularly known as the Bank Nationalization Act.
Incidentally, a panel on capital accounts convertibility, headed by former Reserve Bank deputy governor S.S. Tarapore, too, recommended corporatization of public sector banks.
IBA is in favour of bringing down government stake in phases and even “indirectly”. “For instance, Life Insurance Corporation of India can buy part of government stake,” said Sinor.
Apart from bringing down the government stake to 33%, the Narasimham panel had also suggested transferring the Reserve Bank’s ownership of State Bank of India to the government as it found the dual role of the central bank as a regulator as well as an owner conflicting. This has been done recently.
Both the NDA and UPA governments promised to remove the cap in voting rights of private banks. Under the law, voting rights in private banks are capped at 10%, making it less attractive for institutional investors.