A Hobson’s choice

The Finance Minister, P. Chidambaram’s ‘advice’ to public sector banks to cut their base lending rates highlights the classic dilemma facing governments as both upholder of public interest and owner of firms – which, in this case, happen to be listed as well. There is no doubt that in the current circumstances, a cut in interest rates will do no harm to the economy. At the least, it will help companies to partially offset the cost push pressures from the rupee’s weakening and higher fuel prices, which they are unable to pass on in a weak demand environment. Thus, from a public interest perspective, Chidambaram’s resort to moral suasion is quite justifiable.

But from the banks’ standpoint, a cut in base rates – below which they cannot lend – is easier said than done. The base rate that each bank declares is a function of the cost of its funds, the bulk of which is constituted by deposits. With the outstanding credit-deposit ratio for the banking industry already ruling at record 77 per cent-plus levels, there is very little scope for cutting deposit rates. The only other way to bring down cost of funds is through a reduction in the repo rate (at which they borrow short-term money from the Reserve Bank of India) or the cash reserve ratio (the proportion of deposits required to be maintained with the central bank without earning any interest). Since the RBI has not yielded much with regard to these policy rates, public sector banks are not really in a position to heed the Finance Minister’s ‘advice’. A couple of them have since cut base rates by 25-30 basis points to bring them a shade below 10 per cent, which hardly matches up to the Government’s expectations. The latter would want rates to go down much further, though that might badly dent banks’ margins when they are already confronting a problem of rising bad loans in a slowing economy.

The above conflict of interest, inherent in the Government’s simultaneous role as upholder of public interest and owner of firms, has been seen even in the case of listed state-owned oil marketing companies and Coal India Ltd. The oil companies have had to suffer under-recoveries from selling diesel, kerosene and LPG cylinders at below market prices – a requirement imposed by the Government even while hurting the interests of minority shareholders. In Coal India, one such investor, a London-based hedge fund, even initiated legal action against the Government for allegedly forcing the company to ink fuel supply agreements on non-economic grounds. Whether it is mining firms, banks or oil companies, the conflicting roles of the Government will remain so long as it continues to be majority owner in them. The only way to resolve this is for the Government to either exit business completely or have these companies de-listed.

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