The Hindu Business Line : Norms on ownership, governance of private banks

THE GUIDELINES that the Reserve Bank of India has circulated on ownership and governance of private banks have already attracted considerable comment. While presenting the Budget for 2003-04, the then finance minister had announced that limits of FDI (foreign direct investment) in private sector banks would be taken up to 74 per cent and that restrictions imposed by the Banking Regulation Act that, irrespective of the shares held, the voting rights would be limited to 10 per cent shareholding, would be removed. This announcement came in consultation with, and concurrence of, the RBI. Subsequently, with Cabinet approval, the decision on foreign investment was announced in a press note.

Meanwhile, the Centre had also introduced a piece of legislation to remove the cap on voting limit of 10 per cent of shares. This was referred to a parliamentary standing committee (consisting of representatives of all political parties), which had recommended the legislation for taking up for consideration and passing. Clearly, until this time, the government and Parliament, had considered the need provide for situations where promoters/entitities would have greater than 10 per cent holding, and to facilitate the management of this ownership pattern.

The guidelines now formulated represent a different thinking; rather a reversal of this. The first question which arises, on looking at the guidelines is how and when did this matter move from the government/parliamentary domain to the domain of the regulator? These guidelines, as they are articulated, are not merely regulatory suggestions; they are statements on the future of private banks and their ownership, and in the realm of policy. There is clearly a change of policy here. One does see an ambiguity in the role of the Finance Ministry in this. It is better for all that this should be clarified. It is also of interest that a Bill diluting government's holding in public sector banks was already before a parliamentary standing committee, and its deliberations were still incomplete.

Second, the guidelines do not make clear the malaise, which is being addressed, and how these solutions will address that problem. It would be useful if the RBI were to share the experiences in the current dispensation, and why it feels this is inadequate. It is important that the infirmities of the current state of affairs, and the results thereof, are also in the public domain, because, as the RBI puts it, banks are `special'. What we have in the guidelines is the final conclusions of the thinking processes in the RBI without any clue about what this process focussed on.

One would also like to see clearer articulation of adjectival preferences like "demonstrable professional and other experience" in the guidelines. Demonstrable experience in law? One would like some more clarity on kind of people the RBI is seeking to encourage, and, more clearly, the kind of promoters it wants to keep out.

In practical terms, these guidelines tighten the acknowledgement norms for transfer and allotment of shares. The movement is directed against domestic promoters, not foreign ones. If firmed up, it would affect a host of banks including Centurion Bank, Bank of Punjab, Bank of Rajasthan, etc. It is to be hoped that the guidelines will not result in driving real ownership underground — that would replace one problem with another.

Finally, it is important to recognise that private banks have played an important role in the growth of banking facilities in the country. They have provided options, alternatives and opportunities. They have, in several instances, catalysed actions, which have improved the quality of service in the public sector banks. There is little evidence that they have, in any way, either challenged or threatened the role or predominance of the PSBs.

The banking system has become stronger in the last few years. Maturity of management, closer coordination with the RBI and improved regulatory supervision has enabled the banking system to compare itself with international banks on provisioning and profitability.

It is a healthier banking system than that of China, and internationally recognised and respected as such. NPAs are low, balance-sheets are good, and these two years, they have emerged stronger and more competitive. The threat of increase in interest rates will put pressure on their earnings, as also the increases 0envisaged in the rural component of the credit portfolio. This is a time to nurture, not to scold.

(The author is a former Finance Secretary.)

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