Intriguing moves on banks

By C. R. L. Narasimhan

Speculation abounds on what the Government would do next with regard to the commercial banks owned by it. After having announced its intention to reduce minimum level of its shareholding in 19 nationalised banks, the next important stage would be the exact wording of the bill that will permit the Government to drop its minimum stake in these banks, from the present 51 per cent to 33 per cent.

The passage of the bill will not be smooth what with the opposition to it already crystallising. However, even after it is passed, the process of banks' restructuring will have just begun.

The Government's decision announced during the third week of November was widely expected. It is inevitable that such major moves can never have a smooth passage either in a legislative sense or in their practical application. The other recent development in the financial sector that was equally portentous - and by any standard contentious too - has been the opening up of the insurance sector. Will the latest decision on banks turn out to be a harbinger of far reaching changes in the financial sector or end up as a non -starter? It is unlikely that there will be immediate answers.

A clear contradiction

At this stage even the contours of the proposed bill are not clear. Its main rationale is said to arise from the needs of these banks to access non-government funds.

Reports say that the bill's basic features will include (a) an amendment to the existing law to permit the Government's equity stake to drop from the present level of 51 per cent to 33 per cent. (b) The Government will continue to appoint all senior executives in these even after dilution. (c) Outside non- government shareholders, no matter how many shares they hold, cannot have voting rights in excess of one per cent of the paid up capital. The last two sections will have the effect of continuing with the banks' government character while the first will permit banks to move out of the Government's orbit. (Any undertaking in which Government's stake falls below 50 per cent ceases to be a government company). This contradiction has to be resolved before a final verdict can be passed on the equity dilution move.

Very likely the Government will clarify at the time of the parliamentary debate over the enabling bill. But does it have any room for manoeuvre?

The major premise that the Government need not be the majority stakeholder but can still impose its character on the banks is not logical. There is a point of view of course that the Government has to keep on making statements such as persisting with its own brand of control over banks while simultaneously diluting its stake.

Like in insurance the Government has to keep the reference terms stiff to sell the reform process. This approach may buy peace over the short-term but obviously cannot be an ideal long-term solution.

It is their government character not their ownership pattern that has suppressed these banks. With the ascendance of the market economy, any emphasis on their public sector character automatically handicaps them.

Past achievements do not matter

The latest move of the government comes at a time when much of recent banking history is now in the process of being rewritten. Not very long ago bank nationalisation was considered a seminal event.

Its consequences - the rapid expansion in banking services and the fulfilment of a variety of socio-economic goals - were rightly hailed as significant achievements. The reform of the financial sector beginning with the 1990s has meant a relook at those. Further reform has meant a progressive reduction in government ownership and control. Sadly, as in the latest case, the sequencing of banking reform has not been proper: government equity is sought to be diluted while the deleterious features of public ownership are sought to be retained.

A very basic question: can these banks access the capital markets with their government character in tact? As even top performing public sector banks like Bank of Baroda are finding, the financial markets are not exactly enamoured of continued government control. Seven out of the 19 PSBs are listed on the exchanges. Nearly all of them are trading at substantial discounts to the prices at which they were offered.

The pathetic PE multiples which the PSB shares command - BOB is quoting at just 2.5 its earnings, Bank of India at 3.5 and Corporation Bank at 4.1 - preclude any market access except through a gross undervaluation.

Surely for all their compulsions the authorities cannot allow PSB shares to be sold for a song. If they do, the resultant underpricing of shares would imply a transfer of wealth from the existing shareholders to newer ones. For most PSBs the tax-payers are the only shareholders as of now. Hence as an economic argument too the case for privatising PSBs looks weak. That is why the Government moves are intriguing to say the least.

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