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Anyone For Bank Shares?

There seems to be a great amount of tom-tomming (in Delhi, particularly) over the cabinet resolution on dilution of the government’s stakes in public sector banks. Sure it’s a good thing that the government wants to dilute its stake in banks. But the cabinet’s decision is really a halfway house.

Consider the rationale of the move: Why is the government diluting its stake? Is it because it believes that government should not own banks? Is it because it has recognised that banks not owned by government seem to be doing much better? Is it because government feels there is a conflict between its role in safeguarding savings of individuals and its role as owner of banks? Or is it a result of the government realising that it needs to get out of business? (Clearly, the government is not driven by these arguments.) The rationale for the government’s sudden urge to “reform” lies in a desperate situation of its own creation.

The genesis is in a speech made by Reserve Bank of India, Governor Bimal Jalan a year back. It is the RBI’s contention that unless banks add Rs 10,000 crore to their capital (for purposes of capital adequacy) they would not be able to expand their activities. Not if it cannot get banks to recover dues worth over Rs 61,000 crore identified as non-performing assets (NPAs).

Obviously the government is not in a position to make these funds available. So now it wants to transfer what is clearly a public liability onto individual investors. In other words, it wants individuals to pay for the follies of the government and the banks. Ergo, it has made a virtue out of a circumstance by deciding to dilute their stakes.

The logical question thus is who will buy these shares? Surely not small investors who have already lost a packet in the last round of disnvestment (see chart). Neither would it be high net worth individuals who see no hope in any improvement in banks’ performance with the government still in control. Nor would it be foreign institutional investors (FII’s) who have already burnt their fingers by investing in the sleeping giant called State Bank of India.

So what would the government do now? It would resort to the usual subterfuge. Its expertise in placing shares of oil companies with other oil companies (which led to colossal erosion in market capitalisation) is now well chronicled. Not so well known is its ability to get banks and financial institutions to invest in stocks of other banks and financial institutions.

Indeed, in a recent guideline, the RBI has re-invented the methodology of determining investible surplus. As per the RBI's new guiding mantra, banks can now invest 5 per cent of the total outstanding advances. In English, that means that banks can now invest 5 per cent of the money already lent via various instruments into stocks. The rationale being if they can take a risk on the companies, why not their scrips? So banks can now invest over Rs 23,000 crore (5 per cent of Rs 458,000 crore). And what will they invest in without inviting the threat of a CBI enquiry? Share of other banks and FIs for sure.

Ideally, the government should have invited bids for a stake management control to either foreign banks who are desperately trying to expand their reach and business or to insurance companies entering the country who need to establish a country-wide network to tap household savings and service them. It could have also invited bids from corporate houses that have been trying since 1993 to get into banking (and are now trying backdoor methods to take over smaller banks). But that would have required radical thinking and political courage.

Neither of these qualities is easy to find in government. Thus, the government is trying to sell a halfway house as full-blooded reform.

(V Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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