The Hindu Business Line : Clash of interest

The boards of Bank of Baroda and Andhra Bank have backed their managements by ratifying the hikes in the Prime Lending Rate while Oriental Bank of Commerce has gone quarter-way. The sample will not be complete till the State Bank of India board meets on August 24. The Finance Minister, Mr P. Chidambaram, looks a bit like King Canute. A week ago, he got bank boards to oversee interest rate hikes in the fond hope that they will oblige by retractions. That did not happen. Going by news reports, the Reserve Bank of India nominees absented themselves from the board meetings, queering the turf war between the Finance Ministry and the RBI, legally an arm of the Ministry.

It may be a touch legalistic to argue that New Delhi has not breached managerial norms, being the majority owner of all the public sector banks with the exception of SBI, in which the RBI holds the majority stake. That misses an established convention, put in place in the 1990s by the then RBI Governor, Dr C. Rangarajan, allowing bank chief executives to decide on interest rates. Dr Manmohan Singh was the Finance Minister. Since then, bank chairmen have been going by the meetings of their asset-liability management teams, to arrive at a view on the interest rate. The decisions are placed before the boards for information. For the moment, the convention has been displaced with the banking system caught between the Finance Ministry and the RBI. Players on Mint Street are aware that relations between the Finance Ministry and the RBI have been for some time a touch fractious in private. It is now in the open. The Finance Minister may find the monetary stance of the RBI a bit irritating, if not wayward, with inflation still within the 5-5.5 per cent range, as prescribed by the central bank. There is worry over the climbing cost of funds hurting the pace of economic growth; New Delhi wants GDP to top 8.5 per cent with the monsoon doing a good turn.

Bankers are not lily-white either. Till today, they have not placed in public domain "transparent guidelines for appropriate pricing of credit," as demanded by the central bank early this calendar. The RBI has also confessed to banks using the rural and services sectors to cross-subsidise corporates. In the last week, most public sector banks marked up lending rates uniformly, suggesting a cartel. Mr Chidambaram can nurse a genuine grouse. Going by the new snooping norms set by the Finance Ministry, bank boards could get bankers to okay loans to friends and families. Will that also be acceptable? If bank boards have to be assembled to review and ratify every decision on interest rates, that would probably leave the RBI Governor, Dr Yaga Venugopal Reddy, musing over the quality and restraints imposed by a fenced-in operational freedom.

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