The Hindu Business Line : Empower them to compete

Inaugurating the annual bankers’ conference in Mumbai, Mr Pawan Kumar Bansal, Union Minister of State for Finance, outlined an agenda for public sector banks (PSBs) of pending tasks and fresh challenges without outlining how government-owned institutions were to fulfil either of them in the current competitive environment. That only 27 per cent of the population have access to formal credit nearly four decades after bank nationalisation and directed lending tells us more about the failure of policy than shortcomings of the banking system. At the same time, with the opening up of the financial sector, PSBs are now enjoined to expand overseas, an objective that is even more daunting given their relatively low capital base and their restricted ability as state-owned institutions to raise capital in the manner private banks can. Yet PSBs have to address both the issues on the agenda; the point, however, is whether the government is doing its bit to help.

From various statements emanating out of the North Block that exhort the PSBs to globalise, one could be mistaken for assuming that encouragement was all that is required. From the views expressed at the conclave and other forums it is clear that the biggest deterrent to scale expansion is the ownership pattern that inhibits PSBs on various counts. Consider capital adequacy; while private banks are busy raising their assets through innovative debt and equity mechanisms, while foreign banks can rely on their global affiliations to raise capital and thus take the risks of global expansion, PSBs do not have that leeway. More vitally, PSBs are hamstrung by their incapacity to offer competitive remunerations, governed as they are in their executive appointments by regulations. This makes lateral entry impossible for senior professionals though it does not prevent the flight of manpower to competitors, a concern that has been repeatedly stressed by bank chiefs.

The global expansion of Indian banks also depends on the extent of freedom that host countries allow them. Mr V. Leeladhar, Deputy Governor, Reserve Bank of India, pertinently pointed out that India has opened its doors to foreign banks far more than the US, for instance. Reciprocity certainly determines the extent to which a country would open its doors to foreign competition as it would in any trade relationship. While the Commerce Ministry will have its work cut out for it at the WTO, North Block must also urgently consider the meagre impact of nearly 40 years of ownership on financial inclusion. Dilution of government holdings and a quick movement to Basel II norms under the RBI’s watchful eye would more than enable the PSBs to meet the twin objectives that the North Block has set them. There is no alternative to transferring power to bank boards and shareholders.

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‘Govt encouraging banks to expand overseas’

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