Majority govt holding may hinder growth of PSBs, says RBI report

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Mumbai, Sep 4: The ownership pattern of public sector banks may change in the medium to long term, said a central bank report released on Thursday. The Reserve Bank of India’s Report on Currency and Finance 2006-08 also said the present floor of 51% government holding in state-owned banks is an issue that merits consideration in view of these banks’ need to raise capital and the changing environment.

The RBI report, which also dwells on the presence of foreign banks—up for review in April 2009—said regulatory hurdles and the impact on local banks would have to be weighed before opening up the sector wider. RBI said ownership of public sector banks (PSBs) has to be in tune with the changed operating environment. Though ownership is not an issue from the efficiency angle, since public sector banks look as efficient as any other, the operating environment is changing rapidly and banks need the flexibility to respond to evolving situations, RBI said.

“Another issue that needs to be considered is the funding of capital requirement of PSBs given the present floor of 51% on government equity in public sector banks. In the medium term, this can be become an issue hampering the growth of public sector banks, if the government is not able to provide adequate capital for their expansion,” said the report. Advocating mergers & acquisitions in the sector, the report, based on empirical evidence, said the industry has a “monopolistic competitive structure.”

Various issues associated with the increased presence of foreign banks such as impact on the domestic banks, supervisory and regulatory challenges in view of their sophisticated operations and their involvement in complex and sophisticated products, financial inclusion, credit to agriculture and SMEs, and public policy on credit delivery, cost and allocation would also need to be weighed. The issues relating to co-ordination between home and host countries regulators would also pose a challenge, the report said.

While consolidation is necessary, a policy should be in place to ensure that competition is not undermined in the future.

The first phase of review of foreign banks’ operations in India envisaged that foreign banks wishing to establish presence in India for the first time could either choose to operate through branch presence or set up a 100% wholly owned subsidiary following the one mode presence criterion. In the second phase (April 2009 onwards), the policy on foreign banks is to be taken up for a review.