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Food for thought, Mr Chidambaram

Food for thought, Mr Chidambaram
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First Published: Mon, Feb 26 2007. 01 13 AM IST
Updated: Mon, Feb 26 2007. 01 13 AM IST
 Early this month, at a closed-door meeting with the chiefs of public sector banks (PSBs) that account for three-fourths of the Indian banking industry, finance minister P. Chidambaram requested them not to hike the home loan rates for the time being, as any rate hike would hurt the middle class, already affected by the rising inflation.
This was done a few days after the banking regulator, the Reserve Bank of India (RBI), raised its short-term policy rate, for the fourth time this financial year.
Over the next few days, chief executive officers (CEOs) of the state-run banking industry helplessly watched their peers in the private sector raising all loan rates, including mortgages.
Had RBI not followed up the short-term rate hike in January with another dose of hike in banks’ cash reserve ratio in the middle of February, PSB bosses would not have dared to raise their loan rates. Even then, they have kept the home loan rates untouched.
Theoretically, only the savings bank rate is administered, and all other rates—be it loans or deposits—are free and fair game in the country’s banking system. However, in reality, this is not the case.
Quite a few rates are still administered not by the banking regulator but by the majority owner of PSBs, the Government of India. The price of home loans of up to Rs20 lakh is one such area. Others include agriculture crop loans, export credit and, even, education loans.
To be fair to the government, it doesn’t dictate education loan rates but puts other pressure on banks lend in this segment, even when banks feel that many of their loans cannot be recovered.
These pressures will continue as long as the banks are majority owned by the government. Seven years ago, Chidambaram’s predecessor Yashwant Sinha had announced a plan to bring down the government holding in to 33% with a caveat that the government would retain management control over PSBs, implying that the reduction of its stake would not lead to privatization.
However, nothing has happened on this front. Raising foreign direct investment in the insurance sector to 49% from 26% is another unkept promise. The list of promises made in earlier Budgets also includes a very critical change in the law that governs India’s banking sector—the removal of the cap on voting rights. This is pegged at 10% now, and successive finance ministers have vowed to change it so that voting rights can reflect the actual ownership.
The necessary amendment to the Banking Regulation Act, 1949, for the removal of voting rights cap is still awaited and it may not yet happen in the face of stiff opposition from the Left parities.
In 2003, Sinha’s successor Jaswant Singh reiterated the promise made by Sinha on the removal of the 10% cap on voting rights in private sector banks saying, “The voting rights of any person holding shares of a banking company are restricted to 10% irrespective of his/her shareholding. The Banking Regulation Act, 1949, will be amended to remove this limitation.” Chidambaram is the third finance minister of the country who has been struggling to make this happen.
It isn’t the finance minister’s fault alone. A coalition government at the Centre is indeed the main reason behind the extremely slow progress of India’s financial sector reforms. Another contributing factor is the serious differences between the finance ministry and RBI.
The movement of interest rates is only one of the many issues on which the bureaucrats in North Block and the bankers on Mint Road do not see eye-to-eye. They differ on banks’ reserve requirement, interest payment on such requirements and even banks’ investment in government securities.
A government notification, which the central bank dubs as “extraordinary”, has stalled the move of abolishing the floor for banks cash reserve ratio even after the relevant act was amended.
Similarly, the government has amended the law that forces banks to invest 25% of their liabilities in government bonds but RBI has not acted on this as yet as it feels that if banks are required to invest less in government bonds, they will lend more to corporations and retail consumers adding to the inflationary pressures.
At the first stage, the finance ministry must sort out these issues with the banking regulator, and then address issues such as raising the cap on voting right in private banks, bringing down the government stake in PSBs below 51%, and pushing for consolidation in the banking sector to achieve global scale. This Budget could be the right platform for flagging of such issues.
With bank credit growing at 30% for third year in succession, and corporate India’s appetite for funds rising phenomenally, banks need more capital sooner than later.
They will not be able to access the capital market to raise fresh equity unless the government brings down its stake. And once the government’s stake comes down below 51%, its interference will also come down, allowing PSBs to operate in a free market and compete with their private sector peers on equal terms.
Till such time, the government may consider giving direct subsidy to farmers and middle-class home-loan seekers instead of directing banks to lend in these segments at concessional rates.
After all, they are listed entities, and answerable to all shareholders.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email your comments to bankerstrust@livemint.com
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First Published: Mon, Feb 26 2007. 01 13 AM IST
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