RBI says govt should not own banks, FinMin agrees

Written by ENS Economic Bureau | New Delhi | Updated: May 14 2014, 13:35pm hrs
RBICentre should dilute its holding in public sector banks (PSBs) to under 50%, an RBI panel report said.
Public sector banks could soon move to a holding company model, which would mean cutting government shareholding in them to less than 50 per cent.

Just a day after the exit polls indicated that the BJP-led NDA government could return to power at the Centre, both the finance ministry and the Reserve Bank of India came up with the same suggestion.

Financial services secretary GS Sandhu said, RBI has approved it (holding company model). We are waiting for Sebis reply then we will go ahead. On cue, SBI chief Arundhati Bhattacharya said that the model is under consideration to bring all the subsidiaries of the bank under one company to raise capital.

Hours later, the RBI released a report which said the government needs to quickly cede ownership of public sector banks since their financial position has become fragile.

The report by an external panel set up by the RBI has recommended for abrogation of all bank nationalisation acts and transfer of government shareholding in the banks to a Bank Investment Company.

The governments powers in relation to the governance of banks should also be transferred to BIC, the panel chaired by former Axis Bank chairman PJ Nayak noted. The recommendations are likely to be welcomed by the NDA government (if it comes to power) which had discussed this measure during its earlier term.

Sandhu also told reporters after a quarterly review of the state-owned banks, that the government can provide capital only up to a limited extent and the remaining funds have to be raised from the market. Finance minister P Chidambaram did not address the post-meeting press meet. The UPA government had held to the position that majority ownership of the 29 public sector banks was non-negotiable.

The government had last fiscal put in Rs 15,000 crore to recapitalise these banks. In this fiscal the need will be higher. Sandhu said, Beyond that (government capital infusion) we are trying to enable them that they have to come up with options. RBI is also working on various options. So, we are very soon going to finalise some of these options to enable them to raise money from the market.

The Nayak panel has said the current process of board-level appointments in these banks, including appointments of whole-time directors, needs to be taken out of government control. A Bank Boards Bureau comprising former senior bankers should advise on all board appointments, including those of chairmen and executive directors. It has set a three year time frame to get this done.