Roadmap out for big-bang bank reforms
| While observing that the government ownership of banks could have adverse effects going forward, a committee set up by the Planning Commission has suggested a slew of next-generation reform moves, including selling a few small underperforming public sector banks and possibly roping in strategic investors in larger state-run banks. |
| The committee on financial sector reforms headed by Raghuram Rajan, professor at Graduate School of Business, University of Chicago, has said that the sale of weaker banks can be used for testing the waters and gauging if outcomes are good enough to pursue the process more widely. |
| For other banks, especially larger ones, the panel, while factoring in the possible concentration of financial might in the hands of a few corporate houses, has suggested that a start could be made by creating stronger boards with more powers to outside shareholders, including roping in a private sector strategic investor. |
| The boards can also be given the responsibility to scout for top executives who get better compensation. |
| As a next step, the roadmap has suggested that banks should be delinked from oversight by agencies such as the Central Vigilance Commission and the Parliament. |
| To further reduce oversight, the government can set up a holding company or may shed its direct holding in state-run banks to below 50 per cent through sale of shares to other public sector entities "so that the government (broadly defined) has control, but the government (narrowly defined) cannot be considered the owner. |
| The NDA government had tried to push through a legislation, which would have allowed the Centre to reduce its stake to 33 per cent. But the Bill was allowed to lapse in the absence of political support. |
| To push through the suggested moves, the United Progressive Alliance government will not only need to revive the proposal, but also introduce more amendments so that the sale of shares through routes other than public offers can be permitted. |
| Besides, the UPA's National Common Minimum Programme will have to be reviewed since it has mandated that the public sector character of banks will be mandated, implying that the government will always hold over 51 per cent equity. |
| If the recommendations are to be implemented, the government will have to revive its consolidation programme, with the committee saying, "one method to foster bank growth is to allow bank mergers". |
| But it is not just the government that will be required to rework some of its policies, the panel has also suggested that a more liberal approach be adopted in allowing takeovers and mergers, including by domestically incorporated subsidiaries of foreign banks, which should be treated on a par with private and public sector banks. The Reserve Bank of India's (RBI) existing policy limits consolidation of banks in the private sector, with a more liberal approach to be put in place from the next April. |
| The holding company structure has also been suggested to push through the concept of universal banking. The creation of these entities, to be regulated by a new body, will require legislative and tax changes too. There is also the suggestion, which almost all expert committees have made in the past, to permit banks to set up branches and ATMs without any restrictions. While doing so, the committee wants the regulator to liberalise the process completely two years after an announcement to this effect is made so that Indian entities get time to prepare. |
| New twist to financial inclusion A key element of the reforms agenda for banks includes a new approach to financial inclusion with reduced priority sector lending quotas. |
| Instead the committee has suggested the establishment of small banks in the private sector with a higher capital adequacy requirement, while large entities could provide last-mile services by using modern technology. |
| Besides, the interest rate regime needs to be completely liberalised with more transparency brought in through disclosure norms. |
| While suggesting a shift from exclusive focus on rural areas, the new strategy has suggested issuing priority sector lending certificates to all registered entities in the business. These certificates can be traded by banks that do not meet their priority sector targets. |
| An equitable distribution of banking can be ensured by instituting a service norm that stipulates a certain number of low-frills accounts for every savings account that is opened in high-income neighbourhoods. |