According to a report in FE on Thursday, the government has initiated discussions on the possibility of asking government-run insurance companies?LIC and GIC?to buy stakes in various public sector banks. The ostensible reason behind such a move is to infuse fresh equity into public sector banks. And since the government itself is dealing with a large fiscal deficit, it is unable to pump more money into banks. But the government is clear that it wants to retain complete control over PSU banks, which is why state-owned insurance companies are being used to buy the necessary stakes in public sector banks. Needless to say, this is a second best way to beef up the equity capital base of banks. The government ought to instead allow more public sector banks to list more shares in the stock markets or indeed look for private investors in strategic sales. Or they should pursue the other option to strengthen public sector banks?by allowing them to merge with one another to create bigger entities. At the moment, SBI is the only genuinely large public sector bank in terms of market share.
What the government instead will end up doing is strengthening its control over public sector banks rather than loosening control as it ought to. Of course, there may be the motivation of a quick fix on meeting divestment targets, but getting LIC and GIC to be the sole buyers of divested stakes reduces divestment to an accounting exercise within different agencies of the same government. None of this is to deny that many public sector banks need fresh capital infusion. But that should be accompanied by an attempt to genuinely strengthen the efficiency and competitiveness of these banks. At the moment, government policies explicitly favour public sector banks over their private sector and foreign counterparts. And that has not been efficient for the Indian financial system. As we have argued repeatedly in these columns, Indian banking needs to be much more competitive if it is to serve the best interest of investors and consumers. Both the government and RBI have unfortunately shown little enthusiasm for financial sector reforms so far. Divesting government stakes to private investors would have served the twin purposes of beefing up the capital base and giving greater autonomy to public sector banks in their functioning. Stake sales to public sector insurance companies on the other hand shows that the government is determined to continue with the unsatisfactory business-as-usual attitude in the crucial financial sector.
