X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Stop this dithering on banking reforms - Outside View by S.S. TARAPORE
 
 
Stop this dithering on banking reforms

For too long have political forces and vested interests stalled the dilution of government holding in banks

Central to the financial sector reforms would be the restructuring and financing of public sector banks. The Narasimham Committee II on Banking Sector Reforms (1998) concluded that the fisc just could not meet the capital requirements of PSBs.

Accordingly, it recommended that the minimum government holding in PSBs should be reduced from 51 per cent to 33 per cent. It was argued that reducing the government holding to 33 per cent would not mean a loss of control over the social objectives of PSBs, but it would give a breather to these banks to meet minimum capital requirements.

The impasse

Under the NDA regime, Finance Minister Yashwant Sinha made a valiant effort to get this recommendation accepted, but parliamentarians from his own party blocked the move. The Committee on Fuller Capital Account Convertibility (2006) revived the Narasimham Committee recommendation and also recommended that all banks should be registered under the Companies Act but this was not accepted. The UPA governments I and II swore by the 51 per cent minimum government holding and hence there was an impasse.

The Financial Sector Legislative Reforms Commission (2013) recommended a single Indian Financial Sector Code.

The pronouncements of the present BJP government, however, indicate that they would not deviate from the 51 per cent government holding in PSBs. In fact, there is unanimous support, across all political parties, on the 51 per cent minimum rule, which reveals what kind of vested interests operate at the grassroots level.

The Nayak Committee (2014), inter alia , also recommends that the minimum government holding in PSBs should be reduced to below 50 per cent. Although this is a sensible suggestion it is unlikely to muster political support to undertake the necessary legislative changes.

Immediate financing problems

The PSBs, to be Basel III compliant, would need, by March 2019, about Rs. 2.4 lakh crore of Tier I capital. The Government would need to put up a sizeable portion of this amount; this would clearly be beyond the capabilities of the current fisc.

Moreover, under the present system of financing, the weaker the public sector bank, the larger the government injection of capital, and the stronger the public sector bank, the lower the government injection of capital. Under such a system all PSBs more or less grow at the same rate and the system veers towards a weak structure.

Given the policy of not letting any commercial bank die, over the years, failing private sector banks have been merged with public sector banks with a consequential financial drain on the Government. The merger of the New Bank of India (a PSB) with the Punjab National Bank was a disaster for both the Government and PNB.

Again, facetious suggestions have been made that weak PSBs should be allowed to have a minimum government holding below 50 per cent. The pertinent question which arises is who would subscribe to the capital of these banks.

Damage containment policy

Given the constraints, a practical attempt should be made to minimise the damage to the fisc. In this context a combination of a few minor measures could work towards a significant damage containment policy.

  1. Redefining government of 51 per cent minimum: The 51 per cent minimum government holding could be defined as government holding plus holdings of such public sector units (PSUs) that continue to have majority government holding, with the proviso that if such PSUs have less than 51 per cent government holding, the government holding in PSBs would be raised pro tanto . This will ease the pressure on the fisc of financing the PSBs.

    Incidentally, in France, when banks were nationalised, they held shares in PSUs and PSUs held shares in banks.

  2. Government receipts of dividends to be reinvested in PSBs: The Government should enunciate a policy that whatever dividend it receives from a PSB must be reinvested in that bank.

    This would, admittedly limit the overall growth of the PSB system but it would strengthen the overall PSB system.
Supportive measures

In addition, a number of the Nayak Committee recommendations should be implemented. These could,inter alia , include separation of the posts of chairman and managing director (a recommendation of the Ganguly Report a decade ago), empowering the Board to appoint directors and the setting of each bank's salary structure.

Again, the Government should not be trigger-happy in setting out the regulatory system for PSBs - this should be left to the Reserve Bank of India.

While all these measures may not totally resolve the financing problems of public sector banks, they would minimise the burden on the fisc. To sum up, PSBs need to undertake a bootstraps operation.

Please Note: This article was first published in The Hindu Business Line on October 17, 2014.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 

Equitymaster requests your view! Post a comment on "Stop this dithering on banking reforms". Click here!

  
 

More Views on News

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

Aug 23, 2017

Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

Deep State First (Vivek Kaul's Diary)

Aug 23, 2017

Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

Aug 22, 2017

It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

Aug 22, 2017

Post demonetisation, a cut in bank savings deposits rates was in the offing.

More Views on News

Most Popular

This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

Aug 17, 2017

A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

Aug 10, 2017

Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

Aug 16, 2017

The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

Bitcoin Continues Stellar Rise(Chart Of The Day)

Aug 10, 2017

Bitcoin hits an all-time high, is there more upside left?

5 Steps To Become Financially Independent(Outside View)

Aug 16, 2017

Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

More
 

Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Aug 23, 2017 03:36 PM

MARKET STATS