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Now Govt has to top up funds banks need to grow

P. Devarajan

THE Prime Minister, Dr Manmohan Singh, has ruled out privatisation of public sector banks. That could spell the demise of the most crucial amendment suggested by the Narasimham Committee appointed by Dr Singh as the Union Finance Minister.

The amendments to banking Acts earlier agreed upon by the RBI and the Union Finance Ministry provided for scaling down the government stake to 33 per cent based on the Narasimham Committee report.

Dr Singh, like any of us, could have had, over the years, a change of mind.

But is the change in mindset a matter of conviction or political prudence, with the Leftists waiting to oppose alterations in banking Acts?

The Narasimham Committee had suggested dilution of the government stake in banks to 33 per cent to enable the financial system to raise capital from the public, as a stretched fisc did not provide the financial space for government to fund enhanced needs for capital.

Current laws stipulate that not less than 51 per cent of the share capital of public sector banks should be with New Delhi and not less than 55 per cent in SBI should be held by RBI.

In the last five years, most nationalised banks including SBI have made public issues and brought down government stake to near about 51 per cent.

If now they need more capital, it has to come from the government with Dr Singh ruling out privatisation.

The same point was made by Dr Bimal Jalan in a 1999 speech. To quote Dr Jalan: "So far, a number of strong banks have been able to access capital markets to meet their capitalisation requirements in line with prudential guidelines.

Some of these banks, including SBI, have limited scope to raise further capital from the market within the prescribed floor of RBI and government shareholdings.

If the risk weighted assets of these banks grow in line with the growth in the economy in the next five years, additional capital requirements of these banks may exceed Rs 10,000 crore. As against this requirement, the headroom available for these banks to raise capital from the market is less than Rs 1,000 crore."

Over the last 10 years, the Government has placed some Rs 30,000 crore of tax money with banks to improve the quality of their base capital. Can today Dr Singh repeat this exercise when the investment call on banks could be steep if GDP growth has to touch 8 per cent or more?

To avert any move of Indian and foreign players to get majority stake in public sector banks with government stake cut to 33 per cent, Dr Jalan had argued for prescribing a maximum (at a suitable low level) for shareholding by any single individual or a corporate in public sector banks.

Dr Jalan did not go into details but the RBI and the government could prescribe a 10 per cent limit for a corporate or a house (preferably a house) and 5 per cent for individuals.

More, the RBI has powers to scrutinise any equity purchase touching the 5 per cent mark and can cancel the deal if need be.

In the event, the government will continue to hold majority stake at 33 per cent and maintain the public sector character of the banking sector arising from its fiduciary responsibility. It may not then be necessary to hold on to the current 10 per cent cap on voting rights.

With government holding 33 per cent, bank boards will not be able to alter the mandate; also, banks will not have to report to the Parliament or the CVC or the Finance Ministry, making board appointments more professional.

Simultaneously, the RBI as the primary regulator will continue to have its say.

Dr Jalan has gone further to say, "The Government may also retain the pre-emptive right to appoint, if it wishes, the chief executive and the majority of the board members in public sector banks."

Perhaps, it will also prepare banks for the New Capital Accord (Basel II) expected to be implemented by end-2006. In the Annual Policy the RBI has desired banks to examine in-depth the options available under Basel II and draw a road map by end-December 2004.

The Left and other political parties will then have no reason to be uneasy as the banking system will continue to be manned by the Government and RBI.

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