The Reserve Bank of India (RBI) and the government have often been at loggerheads about state-owned banks. As the chief shareholder in these public sector banks, the government has often sent diktats to them in furtherance of their larger economic policy. The RBI, however, as the regulator for the banking sector, does not always see these instructions as useful for the sector - and, in any case, resents what it sees as overstepping into its domain. The latest such disagreement, as this newspaper has reported, is regarding automated teller machines, or ATMs. The Union finance ministry has told all public sector banks that ATMs must be opened at all their rural branches, as part of the programme to increase financial inclusion. Only 10 per cent of India's ATMs are in rural areas. This is partly because some of the relevant branches lack infrastructure; partly because it is difficult to guarantee security; and partly because it is simply uneconomical to run rural ATMs.
On this occasion, the financial inclusion plan was broadly agreed to by the RBI, and the government can hide behind its shareholder role in public sector banks. But the larger problem cannot be ignored. After P Chidambaram took over as finance minister, he insisted that the ministry would no longer casually contact state-controlled banks - in fact, that he would do the communication himself. However, the underlying problem, of the government warping the state-owned banks' priorities, has not gone away. Micro-management of public sector units by the government has always been their bane - and it is even more problematic when it occurs in the banking sector, which is so crucial for the stability of the economy. Indeed, much meddling can be said to have political overtones. Certainly, this ATM-related move can be seen as such, given how close it is to a general election in which the ruling Congress party has its back to the wall.
The only way out is to ensure that public sector banks are granted real autonomy. This will require the dilution of the government's stake in them sufficiently so that it can no longer hide behind the shareholder excuse - in other words, the government must take its stake below 51 per cent. This makes sense in various other ways, too - after all, recapitalisation of troubled banks is likely to blow a hole in a cash-strapped public exchequer. The Bharatiya Janata Party (BJP) had promised to reduce government holdings in banks to 33 per cent in its 1999 manifesto, but it failed to follow through with its commitment. In fact, the then finance minister, Yashwant Sinha, insisted "the public-sector character of the banks would not change". The current government has refused to even consider the possibility of parting with control over public sector banks, since it would effectively be a reversal of Indira Gandhi's bank nationalisation. However, it is increasingly clear that the current system, in which a large part of the banking sector is pushed into economically unfeasible territory by diktats from New Delhi - with their solvency guaranteed by taxpayers - is unsustainable. The BJP's 1999 proposal should be given new life and be a major goal for reform-minded politicians.