Three years after a Cabinet decision to buy out Reserve Bank of India?s stake in National Housing Bank and Nabard and list them, the government has conceded to RBI?s objections in this regard and put the plan on the backburner.

In Budget 2010-11, the finance ministry has, therefore, dropped the allocation of almost Rs 1,900 crore it had earmarked for the purchase. The sum was on the books for the past two years. A senior government official said the delay and abandonment of the significant plan for the development of the real estate sector and improvement in agricultural financing could have been avoided, if the Financial Stability and Development Council had been set up earlier.

NHB is the regulator-cum-apex bank for the realty sector. Nabard too performs a quasi-regulatory role in agri-finance, besides being the chief refinance organisation for agriculture, small scale industries and other related sectors.

The government had planned to list the two entities as part of its plan to make them strong leaders in the two critical sectors. But that will not be possible as long as RBI holds a stake in them. As per company records as on June 30, 2009, total sanctions by NHB stood at Rs 15,729 crore. The year-on-year growth in sanctions was 18%. As on March 31, 2009, Nabard had made an advance of Rs 98,852 crore, a year-on-year growth of 19%.

A government official, aware of the issue, said it was precisely such a setback which the FSDC, possibly headed by the finance minister, would be able to sort out. Among others, the FSDC?s mandate is to ensure financial sector reforms. ?FSDC will do what is currently not being done?, he said. The Cabinet decision could then still be salvaged, he said. It is expected that in the new fiscal, the issue of transfer of stake in NHB and Nabard will be among the first to be placed before the FSDC, once it is constituted.

In February 2007, the Cabinet decided that the shareholding of RBI in both these entities should be bought out by the finance ministry. This was necessary to create a distance between the banking sector regulator and its interest in these organisations. At the same time, the government took a similar decision for State Bank of India too.

While the finance ministry was able to buy out RBI stake in SBI for Rs 35,000 crore by June 2007, the plans for Nabard and NHB were stymied. As per the Cabinet note, it was supposed to be completed before June 2008. One of the reasons for the delay, acknowledge finance ministry officials, was the long preparatory work for the share transfer in SBI, including arranging cash for the listed company.

Subsequently, when the plan to change ownership was discussed, RBI put up several objections. It contended that as the market conditions in real estate was immature, there was a consequent need to keep lending norms for the sector in congruence with that of the banking regulator, RBI. On Nabard too, the arguments supported the need to keep priority sector lending in close contact with the RBI. This was disputed by the finance ministry, which feels that regulatory action would be hard-hitting if it is not circumscribed by the need to provide for protected players in the market. It had cited the cabinet decision in its favour.

The Cabinet had noted that following the transfer, ?RBI will be able to focus on its regulatory and supervisory functions, and it will also remove the conflict of interest in due discharge of its duties as the banking regulator and also having ownership in banks/financial institutions?.