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Monday, Jul 05, 2004

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THE RESERVE BANK of India could have waited on the proposal to cap holding of equity at 10 per cent in private banks as the extant rules are stiff enough to protect depositors. The RBI nod is a must for an individual or a group to acquire 5 per cent stake in a private bank. A foreign bank can acquire an Indian private entity only if the former shuts down its initial operations, going by the order issued, surprisingly, by the Department of Industrial Policy and Promotion in New Delhi; new banks cannot be set up by large corporate houses, and individual companies can hold only 10 per cent stake. Yet, the RBI prefers the bolt and the hammer, and the latest proposal that tries to ensure diversified ownership could end up drying the flow of fresh capital into private banks. Diversified ownership does not guarantee there will be no concerted action by entities holding 5 or 10 per cent stake nor does it promise a professional board.

The RBI does not want to meddle with the boards of private banks yet prescribes fit and proper norms for directors of these entities, while remaining silent on the boards of government banks. A few private banks set up under the 1993 policy of the RBI came close to going bust. One of them is now in better health with foreign funding but the others may have a problem attracting top class investors with the 5 and 10 per cent limits in place; importantly, government funding has been absent. The many community-based private banks in the South can easily get round the fresh stipulation by concerted action that the RBI will find hard to nail down. For some time now, the RBI has been nursing an unnatural dislike for private banks, partly explaining the desire to go after the family details of investors in the latest codicil. Over a period, equity stakes could change hands to fall in line with the RBI regulations but that may not mean a strengthened capital base for banks; nor are mergers or alliances, thought of at one time for the tiny and unviable old private banks, going to come easily.

It will be embarrassing for the RBI to justify leaving out government banks with 51 per cent stake held by New Delhi. The touching faith of the RBI in government banks, accounting for about 80 per cent of the business, cannot pass, as it took more than Rs 20,000 crore to clean up their balance-sheets; nor by any measure, are government banks close to the basics of corporate governance as every executive appointment, including on the boards, is done by New Delhi. To be effective, the RBI could compress its regulatory brief by bucking up on marking intelligence and tracking banks on a daily basis, if necessary. Banks should make profits and depositors should not be hurt. That may not be achieved by the new rules put up for debate by the RBI.

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