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Saturday, Jul 06, 2002

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Money & Banking - Public Sector Banks
Industry & Economy - Disinvestment
Columns - On Mint Street

Why can't banks get back to the basics?

P. Devarajan

BANKS will be charging margin money ranging between 40 per cent and 50 per cent on funds advanced to bidders tied up with the PSU disinvestment process. And one is unsure of the interest to be charged by banks on the funds. Also they will value the shares of the PSUs offered as collateral against the advances with book value playing a critical role in the case of unlisted companies.

Funding the disinvestment process will be out of the ambit of the rules for stock market lending. Total exposure to capital market is presently capped at five per cent of a bank's total advances as of March 31 of the previous year and this should not exceed 20 per cent of the bank's net worth.

RBI is working on guidelines and bankers believe they will be granted freedom to decide on details. It is quite likely bank boards will decide on a bank's total funding of the disinvestment process with further caps on each bidder or each PSU.

Surely, the move looks like public funding of PSU privatisation and reduces the burden on bidders to make genuine bids. Now bidders can use ADR/GDR proceeds and bank funds (in principle there is nothing wrong), to acquire PSUs.

In addition, it should be mandatory on private bidders to put up at least 70 per cent to 80 per cent of their own funds for acquisition. Otherwise, the private bidders may have no stake in the game. After all, the same bidders, after acquiring PSUs, will come back to the same banks for working capital and long-term loans.

Some in the market are still critical of banks putting their feet into stock markets and PSU disinvestment process. A few banks (mainly new private banks) have lost monies in recent years on the stock exchanges.

As of date all stock market trading is insider trading with every broker having some links with company chiefs and most companies trying to make a fast rupee.

After the Tata-VSNL deal, disinvestment has lost quite a bit of charm, as one is not sure if the private parties taking over public sector companies will be fair.

Will the new bank funding principle hold when the Government disinvests its shareholding in banks to 33 per cent as proposed? In course of time Mr Jaswant Singh will be looking into Bills allowing Government to have a minority 33 per cent stake in nationalised banks including SBI. If the Parliament okays the amendments, the banks could come out with public issues and at that point of time will banks provide funds to the public to buy shares from the market?

At that point, there is every chance of corporates picking up a chunk from the market and could ask for bank funds.

There is always this argument of foreign banks playing the markets in the US and the UK. But then they have some tough regulators who believe in action.

Somehow one gets the impression that banks in India are getting less and less interested in doing their basic job of providing funds at low interest rates to push growth in industry, agriculture and services.

The Indian economy is sufficiently under-developed for banks to get back to basics.

How is it that none demurs providing bank funds for PSU disinvestment while none is bothered of the total lack of interest in banks to fund the farm or services sectors?

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