The Hindu Business Line : Fully `bankable'

The Tarapore Committee Report on Fuller Capital Account Convertibility has gone beyond just recommending differential capital adequacy for banking conglomerates. It has suggested that industrial houses be allowed to set up banks and that non-banking financial companies convert themselves into banks. The report meets a long-standing demand of industrial houses and business community.

In the past, several banks were promoted by business communities and individuals. Why should the industrial houses not be allowed to do the same, flush as they are with funds? However, the question that arises is, how would this recommendation be compatible with the Finance Ministry drive to merge smaller banks to form big ones and consolidate all public sector banks into seven entities so that they get the size to compete globally.

The Tarapore Committee's recommendation goes against the Reserve Bank of India set cap of 10 per cent holding by industrial group in banks. Of course, this cap can be raised to, say, 15 per cent. But the banks promoted by the industrial houses will have to have at least 1,000 branches to be viable. It is only logical that the industrial houses will increase their holdings in existing banks through the capital market.

Stake in PSBs

The Tarapore panel has also advised the Government to reduce its stake in public sector banks to 33 per cent from the current 51 per cent. This goes against the recent legislation that the government holding will be maintained strictly at 51 per cent.

The panel's recommendation will go a long way in changing the ownership structure of banks, giving them more autonomy in their functioning so that they can compete with foreign and new private banks. But it must be noted that privatisation is no guarantee for efficient functioning or healthy banking practices.

Many private banks have been closed or are being merged with other entities.

No economic unit can work competitively unless its management observes the codes of accountability and transparency in the accounting system. Also, the disinvestment processes in banks should be put through via public offers and not by strategic offers and all such capital issues should be routed and approved by the Securities and Exchange Board of India.

The Tarapore Committee has also recommended that banks be allowed to borrow overseas up to 50 per cent of their paid-up capital and free reserves in 2006-07, and this level is to be raised to 75 per cent and 100 per cent in 2007-08 and 2008-09 respectively. However, the overall combined limit for all banks should be fixed, else it may lead to reckless borrowing. As advised by the Committee, banks should not just deal with derivatives, market-making, cross-border lending and borrowing or investment operations.

They must observe exposure limit. Banks should have been barred from lending against the equity shares offered by brokers and traders in the secondary market as it leads to overtrading and volatility in the market.

The Committee's recommendation to increase the risk weight on lending to the weaker sections would discourage the banks from lending to people below the poverty line. This will go against the UPA Government efforts to help the have-nots.

Finally, the proposed transfer of 59.73 per cent RBI holding in the State Bank of India to the Government of India. As a regulator of banks, the RBI cannot regulate itself as a shareholder in the SBI. The former should have transferred these holdings to the government long back as it cannot sell the equity capital in the secondary market.

Restructuring norms

Given the `conglomeratisation' of banks, introduction of Fuller Capital Account Convertibility and expected inflows of foreign capital, the RBI will have to restructure the regulatory norms too. There is need for an integrated regulatory framework to supervise and regulate all financial services offered by banks.

(The author is former Economic Adviser, SEBI.)