The Hindu Business Line : `Govt ownership in banks stifles growth'

Government ownership of banks stifles growth and does not foster best business practices in banks, said Mr R.Viswanathan, former Deputy Managing Director, State Bank of India. He was delivering the fifth endowment lecture, on "Government ownership of banks" organised in memory of Dr T.K.Velayudham, former Advisor to the Reserve Bank of India, organised by the Institute of Economic Education in Chennai on Thursday.

Pointing out that this topic did not apply only to India, he said ownership has three facets - financial control, managerial control and responsibility for the losses of the owned entity. While in the developed world, the State does not have financial or managerial ownership, they do own up the losses of big banks and financial institutions. It happened in Japan a decade ago, it happened in the US, when the government had to bail out Savings and Loans companies in the eighties, and more recently in the UK, when the government pumped in $108 billion to save a failing mortgage bank, called Northern Rock.

He said unprofessional boards, poor selection processes, limited tenures, bureaucratic and risk-avoidance mindsets had taken their toll on government banks. The share of public sector banks in aggregate deposits had fallen from 82.6% in March 1999 to 73.9% in March 2007, while private banks had seen their share grow from 4% to 15.3% in the same period. Discussing the short tenures of bank chiefss, he said the SBI has had 11 CEOs during the last 20 years; whereas the biggest private bank had just 2 CEOs in the same period.

Talking of board governance, he said, the boards of nationalised banks are filled usually with politicians or their sympathisers owing allegiance to the ruling party. When things go wrong, there was no accountability at the board level.

Speaking on the disparity in the pay scales, Mr Viswanathan said that it is invariably stipulated that no CEO of any public sector bank can be paid remuneration in excess of the salary earned by the topmost bureaucrat. This means that even the head of SBI, which is nearly twice the size of ICICI Bank in the private sector, is paid less than 3 per cent of the salary of the CEO of ICICI Bank. (Put another way, the CEO of SBI earned the equivalent of 10 days salary of the CEO of ICICI Bank).

He said that mergers among public sector banks would be desirable now in view of the threat of competition from foreign banks that may be allowed entry after 2009. They would be tempted to indulge in predatory lending as had happened in the sub-prime lending in the US; while they can bear the resultant losses, smaller Indian banks would be put to financial distress.

Mr Viswanathan suggested that the limit for deposit insurance be raised from Rs 1 lakh per bank per depositor to at least Rs 10 lakh. The current limit had been fixed a few decades ago and it was time to revise it upwards. This would strengthen the safety of bank deposits, he said. -

Our Bureau