December 11, 2000 Issue

  Invasion From the East
The sudden deluge of consumer products from China, Thailand, Singapore and Malaysia has opened up new shopping options for consumers.


Ministers Of Idle State
Appointed by the NDA Government with a view to appease groupings in a mammoth coalition, junior Ministers are only proving a financial drain.


Just Year Say
Ram Jethmalani finds few takers for his allegations that Chief Justice Anand is functioning beyond retirement age.


Fifth Column
by Tavleen Singh
Poverty Politics

by Jairam Ramesh
Great Mall Of China

    Politically Correct
by P. Chidambaram
Make The Buck Stop

    Right Angle
by Swapan Dasgupta
At Peace With Angrezi
by Dilip Bobb
Mixed Doubles
Other stories
  Indian Divorces Act  
  Kashmir Cease-Fire  

Dying Tone


Hedging His Bets




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.)



Signor Style
At a Benetton store in Delhi's Greater Kailash I market, the billionnaire Italian sportingly donned a bandhini turban for the benefit of the non-stop flashbulbs.

Looking Glass

Delhi: Restaurants

Mumbai: Cafe

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1971: The Untold Story
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