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POLITICALLY
CORRECT
Make
the Buck Stop
Inject
accountability into public-sector banks by reducing government's equity
By
P. Chidambaram
Who
is afraid of privatisation? There seems to be a race to capture the top
slot among trade unions, the swadeshi brigade, the Left ideologues and
the Congress party. The issue has come to the fore in the case of dilution
of government equity in nationalised banks.
This is
what the finance minister said in his budget speech on February 29, 2000:
"In recent years, RBI has been prescribing prudential norms for banks
broadly consistent with international practice. To meet the minimum capital
adequacy norms set by the RBI and to enable the banks to expand their
operations, public-sector banks will need more capital. With the Government
budget under severe strain, such capital has to be raised from the public
which will result in reduction in government shareholding. To facilitate
this process, the Government has decided to accept the recommendations
of the Narasimham Committee on Banking Sector Reforms for reducing the
requirement of minimum shareholding by government in nationalised banks
to 33 per cent. This will be done without changing the public-sector character
of banks and while ensuring that fresh issue of shares is widely held
by the public."
The first
Narasimham Committee was appointed by Manmohan Singh as finance minister
in the Congress government. The second Narasimham Committee was appointed
by me during the tenure of the United Front (UF) government, but the report
was completed and presented, after the BJP-led Government took office,
to Yashwant Sinha. His speech, quoted above, indicates that his Government
accepted this recommendation of the Narasimham Committee. If finance ministers
are presumed to act with the approval of their prime ministers-and of
the party or parties in government led by the prime minister-there should
be virtually no opposition to the proposal to dilute the government's
equity to 33 per cent. In any case, the Congress should not be opposed
to this policy prescription. And lest they forget, Indrajit Gupta, Ram
Vilas Paswan and Mulayam Singh Yadav were ministers in the UF government.
The TDP and the DMK were also members of the UF government. Strictly speaking,
they should support banking reforms, but they have maintained an ominous
silence on the issue.
No Surprises:
On November 15, the RBI presented its annual report for 1999-2000. There
are no surprises. In terms of profitability, the group of 42 foreign banks
ranks first with an operating profit of 3.24 per cent and net profit of
1.17 per cent of total assets. The 19 nationalised banks, as a group,
occupy the last rank, with an operating profit of 1.30 per cent and net
profit of 0.44 per cent. The wage bill of nationalised banks is the highest
at 1.88 per cent of total assets. Despite higher operating expenses (3.21
per cent), foreign banks have a wider "spread" (interest income
minus interest expended) of 3.85 per cent compared to only 2.67 per cent
for the nationalised banks. The State Bank Group of eight banks has performed
marginally better than the nationalised banks. And the private-sector
banks (both old and new) have better ratios than the nationalised banks,
except in the case of spread. As a percentage of net advances, net non-performing
assets (NPAs) of foreign banks is 2.4 per cent, of all private-sector
banks 5.6 per cent, and of public-sector banks 7.4 per cent. Is any more
argument needed in favour of banking reforms?
Banks require
capital. The Central Government had contributed Rs 20,466 crore towards
recapitalisation by end-March 1999 and has exhausted its capacity to provide
the capital. It has confessed that it cannot provide more capital. So,
banks are between a rock and a hard place. And none of the opponents to
the dilution-of-equity idea seems to have any counter-proposal to raise
capital and save the banks.
I shall
assume that nationalisation was necessary in 1970. It paved the way for
branch expansion, rural banking, priority-sector lending and funding many
anti-poverty projects. The results were mixed. NPAs ballooned and crony
capitalism became rampant during this period. I am afraid nationalisation
is an idea whose time is over.
Banking
is a business and not an extension of government. Banks must be self-reliant,
lean and competitive. The best way to achieve this is to privatise the
banks and make the managements accountable to real shareholders. If "privatisation"
is a still a dirty word, a good starting point will be to restrict government
stake to 33 per cent.
Sinha has
staked his reputation on banking reforms. Opinion polls and surveys have
pointed out that Indians will be quite comfortable with the management
of banks in private and professional hands. If the opposition to this
simple reform step thinks that it has the support of the people-or at
least of the customers of banks-it will be sorely disappointed. The A.B.
Vajpayee Government has been presented with an opportunity which it should
seize and strike a blow for reforms. Let us see who blinks first.
(The
author is a former Indian finance minister and a TMC leader.)
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Enron
symbolises everything that's wrong with the way reforms were handled by
M/s Rao & Manmohan, says INDIA TODAY Associate Editor
