The Hindu Business Line : Free the public sector banks

One pleasant surprise of the current equity boom is the performance of bank stocks. Most investors would expect private banks to lead from the front given their capacity for innovative financial offerings, lower carrying costs than those of the public sector banks. But public sector bank stocks too have been performing just as well even with their lower price earnings ratios; not just of the State Bank of India but those of other banks have grabbed the attention of foreign institutional investors. So much so that many FIIs have hit the prescribed stake limits in public sector banks; yet the their appetite seems unappeased. If Mark Mobius' views are any indication, the FIIs are keen to take higher exposures in public sector banks, a hint that the Reserve Bank of India should consider along with the reforms necessary to turn them globally competitive.

There is no gainsaying that financial sector adapts itself to the changing contours of a nation's growing economy and the process results in its reach deepening to include of many of those currently excluded. In India, that inclusion has however been restricted mainly to those living in the urban areas. Ironically, reforms have spurred the banking system, including even the public sector banks, to offer their new financial services in the urban areas by and large; the no-frills savings accounts that could have speeded up financial inclusion in the rural areas has been a non-starter for banks pursuing healthy bottom-lines by focusing on those already in the financial system. But apart from the need to expand business at the margin, India's banks have to get bigger if they are to compete in the global market for business and cater to the complexities of the rupee's full and free float.

In this context, policymakers should think out of the box and give public sector banks more leeway for mergers and acquisitions. One way is to reduce government holding in these banks so as to allow greater investor participation. Increasing stakes by private entities will create greater accountability and improve profitability indices across the board. The fact that private banks have performed better than their public sector counterparts provides ample proof of this premise. At the same time, the RBI ought to know that directed lending has not succeeded so far and that in the present concern for prudential banking, un-rated credit can prove disastrous. Differential risk weights have to be assigned for borrowers and the sooner that is done, the better will the public sector banks fare in the global equity markets.