When the UPA government took office last year, concerns about the attitude of the coalition towards economic reforms were assuaged to some extent by the appointment of reformers with proven credentials. Mr Chidambaram was certainly a key to providing this comfort. Unfortunately, going by his recent statements with regard to the banking sector, he seems to be in a hurry to shed his reformist image. On November 11, at the Bank Economists' Conference in Kolkata, he asserted that bank credit had not adequately penetrated the Indian economy and he wanted it to rise to a level of 50 per cent of GDP, from the current 35 per cent, over the next five years. The economy can be expected to grow by about 75 per cent in nominal terms during this five-year period; so the finance minister's goal of taking credit up from 35 per cent of 100 to 50 per cent of 175 therefore means increasing credit by 150 per cent in five years""or a compound annual credit growth rate of 20 per cent, without reference to macro-economic balances and inflation pressures. This newspaper last week questioned the logic of such an aspiration in today's financial market context and pointed to the dangers of indiscriminate expansion of credit by banks under pressure from the finance minister. Now, at a meeting with the chairmen of public sector banks, Mr Chidambaram has persuaded them not to raise lending rates to the corporate sector, in order to not dampen business enthusiasm for growth. | |
| There are at least two tenets of reform which the finance minister's diktat to banks violates. One is the independence of the Reserve Bank of India (RBI) with respect to the conduct of monetary policy and price stabilisation. On October 25, the RBI hiked its benchmark reverse repo rate because it believed that inflation was becoming a threat and demand pressures had to be eased. Its intentions can only be translated into action if the banking system were to increase lending rates all round. The finance minister accepted the merits of this decision then, but his message to bank chairmen is in contradiction to this. In effect, he is asking them to deliberately neutralise the impact of the RBI's action on interest rates. In a reversal of reforms, North Block is now countering Mint Street. |
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| Second, reforms have been clearly associated with an improvement in corporate governance standards, in particular the protection of minority shareholders' rights. Over the last 15 years, many public sector banks have issued shares to the public and, as a consequence, decisions by the management have to balance the interests of the majority shareholder, viz. the government, with those of a substantial minority. If the combined impact of market forces and the RBI's action is to push up interest rates, protecting lending rates will unquestionably hurt the profitability of these banks. The government might be willing to absorb this impact, but this action is against the interests of the other shareholders. This is particularly ironic in the context of the Securities and Exchange Board of India's (Sebi's) determination to ensure that listed companies comply with Clause 49 of the listing agreement, which involves a series of measures specifically intended to protect minority shareholders. |
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