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KAUTILYA
Banking
on Dilution
Reduction
of government shareholding in public-sector banks is inevitable
By
Jairam Ramesh
A
big battle is brewing over banks. The Government will introduce legislation
in Parliament shortly to reduce its shareholding in the 27 public-sector
banks to a minimum of 33 per cent. This is being seen as privatisation
and has been opposed by bank employee unions. The Congress, which nationalised
the banks through the Banking Companies (Acquisition and Transfer of Undertakings)
Act of 1970 and 1980 and then amended the Act in 1994 to set the minimum
government shareholding at 51 per cent of paid-up capital, will also resist
this initiative.
 But
is this actually privatisation? According to the Companies Act of 1956
it certainly is-any company in which the government owns less than 50
per cent equity is a private company. However, the public-sector banks
are not governed by the Companies Act. They are governed by special laws
made by Parliament. Thus, government holding can decline to 33 per cent
and the public sector character of the banks can still be retained if
the law is so defined. Technically, however, the law does not permit the
sale of government shares. It only allows the issue of fresh shares. Thus,
strictly this isn't disinvestment but diversified ownership.
Banks have
to double their capital base roughly every five to seven years to maintain
their business share, to provide security to their depositors and comfort
to the regulator, that is, the Reserve Bank of India (RBI). In the last
seven years, successive governments have pumped in a total of Rs 20,446
crore to improve the financial position of nationalised banks. This has
come through the Central budget. Now, at least another Rs 15,000 crore
is needed over the next four to five years. The Government will find it
impossible to provide this level of support, given its precarious fiscal
position as also the competing pressures on public expenditure. Thus,
banks have no alternative but to raise money from the capital market.
The government has promised safeguards to ensure that no single party
garners a substantial chunk of shares. It must also ensure that cross-holdings
among the banks themselves do not predominate. This is most likely to
happen.
Inherent
Flexibility: Today, the government holding is 100 per cent in Allahabad
Bank, Andhra Bank, Bank of Maharashtra, Canara Bank, Central Bank of India,
Indian Bank, Punjab & Sind Bank, Punjab National Bank, UCO Bank, Union
Bank of India, United Bank of India and Vijaya Bank. These banks have
sufficient flexibility to go to the market. The real problem arises in
the case of the State Bank of India (SBI), where government holding is
59.7 per cent, Bank of Baroda (66.9 per cent), Bank of India (77 per cent),
Corporation Bank (68.3 per cent), Syndicate Bank (73.5 per cent), Indian
Overseas Bank (75 per cent), Dena Bank (71 per cent) and Oriental Bank
of Commerce (66.5 per cent). For these banks specially, the existing floor
of 51 per cent government ownership will constrain their ability to raise
resources and get good value for their shares. Further, there is nothing
special about 33 per cent. The minimum might as well be 1 per cent for
that matter. But 33 per cent gives the impression of substantial government
presence which 1 per cent does not convey. Indeed, the 33 per cent has
as much logic as the prevailing minimum of 51 per cent.
Will development
lending by banks be hit? No. Priority sector lending has nothing to do
with ownership. Public sector banks provide 40 per cent of their advances
to government-specified sectors that include agriculture, rural development,
small-scale and agro-industry, small transport operators, self-employed,
software, venture capital, etc. Private banks also have the same stipulation,
whereas foreign banks have to set aside 32 per cent mainly for credit
to exports and small industry.
Nationalisation
has ensured a geographical spread. Around 44 per cent of the about 46,000
branches of the 27 public-sector banks are in rural India (rural being
defined as a place with a population of less than 10,000). Up to 45-50
per cent of the institutional credit flowing into agriculture annually
is through these commercial banks. This too is an important achievement,
although it also reflects the failure of regional rural banks and cooperative
banks to expand rural lending. But nationalisation has also created a
work environment that is just not conducive to efficiency. Our public-sector
banks can be transformed and be in a position to meet the challenges they
confront only if they are converted into companies under the Companies
Act. This gives them managerial flexibility impossible for parliamentary
creatures. Government equity can then be set at any level. For instance,
there is a case for retaining strategic control in SBI and in banks that
serve poorer regions. But for most banks, 26 per cent government share
will be sufficient. Even that may not be necessary since there is an independent
regulator whose job is to protect the public interest.
(The
author is with the Congress party. These are his personal views.)
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