It couldn?t have been better put. ?Occasionally, there are concerns over the government exercising its ownership rights not through the established channel, which is the board mechanism, but outside of board,? RBI Governor Duvvuri Subbarao observed in a speech last Thursday. Nobody missed the allusion to the constant interference, by DK Mittal, secretary, financial affairs, in the running of state-owned banks. Mittal?s missives have become more frequent; he was last heard directing banks on the share of bulk deposits they should be holding. Government meddling in state-owned banks is not new but there?s no harm in RBI reminding the finance ministry that ownership rights should be exercised via the board. The most blatant misuse of power in recent times has probably been the directive to LIC to buy equity stakes in banks as also in ONGC when the auction in February this year bombed.
For their part, banks come across as somewhat submissive, and while it?s understandable they wouldn?t want to annoy their bosses in the finance ministry, they could at least get tough with their customers. It?s probably true that much of the mess?the pile-up of potentially toxic loans, especially to entities like the SEBs as also to Air India?has been the result of the government prodding the banks to throw good money after bad. But there is also a long list of private sector companies that are queuing up before the CDR. The CDR norms need to be tightened and tightened quickly so that promoters bear their fair share of the load and don?t get away lightly. Converting debt into equity shares or convertible debentures should not be encouraged; one wonders how the government stood by and watched while banks converted loans to Kingfisher at a premium and what it has to say about the large amount of restructuring that is taking place now.
While it may not be the mandate of RBI to micromanage banks, these are difficult times and the central bank must step in if the government oversteps its brief. A chunk of real estate loans was restructured in 2009 post-Lehman and now the government is hoping to bail out SEBs by directing banks to give them a moratorium. The amounts involved are large?bank exposure to SEBs is around R2 lakh crore?and banks can?t be expected to pick up the tab for what is essentially the indulgence of state governments. Since the government isn?t particularly concerned about corporate governance when it comes to itself, RBI must be more assertive. Governor Subbarao?s message is loud and clear but if the government chooses not to hear, RBI must step in to protect the interests of banks. Meanwhile, Mittal would do well to limit his views to the boardroom.