The Hindu Business Line : Banking on ownership

After 25 years of being in the forefront of agriculture refinance and development credit, the National Bank for Rural Development may be just discovering a more critical role for itself thanks to the farm sector’s dismal record compared to industry and services. Now that the Government has begun in earnest to pull up the hinterland by its bootstraps, what better agency to do the hauling than Nabard, especially with its refinance functions and supervisory role over Re gional Rural Banks that supposedly are clued in about what is happening at the grassroots.

Nabard’s strategic positioning may explain the possibility of a change in its ownership soon. The Reserve Bank of India holds 72.5 per cent of the agency’s stake, the rest being in government hands. The RBI may transfer its stake to the latter thus making Nabard the second premier institution, after the State Bank of India (SBI), into a majority government-owned financial intermediary. As in the SBI case, the transfer is likely to be justified on the grounds that the RBI should not combine the functions of a regulator and owner. Barely a fortnight ago, the Government acquired the RBI’s 59.73 per cent stake in the SBI for the same reason; within the year the Centre will also acquire the central bank’s stake in the National Housing Bank. These transfers are prompted by the Narasimham II Committee on Banking Reforms that suggested that the RBI divest its ownership in banks and financial institutions. On principle this is an eminent idea but whether it is equally sound to transfer the ownership of both the SBI and Nabard to the Government is quite another matter. That Nabard’s ownership should remain in the public domain is perhaps necessary as it has to help the weakest sector; its own refinancing can be done with cheap government funds.

But the SBI? Given the fact that large private banks are accessing equity and debt markets to recapitalise and grow bigger, the SBI can hardly expect to look to a government that has other commitments and its own fiscal prudence concerns, for the kind of funding the bank would require to stay in competition. This is why the Tarapore II Committee on Fuller Convertibility, anticipating the transfer last year, termed it a “retrogade step”. While further banking reforms may open more avenues for foreign banks by April 2009, the SBI will be handicapped by the Government as its single largest owner. The ‘one-size-fits-all’ approach to banking reforms may extract a heavy price before long.

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