The nationalisation of banks in 1969 heralded the era of social banking, whereas economic reforms from the early 1990s began the era of corporate banking. This is not surprising as macro policies too had changed with an unprecedented emphasis on the corporate sector. In line with external changes, banks in India are forced to find new business opportunities; at the moment, financing mergers & acquisitions has become their favoured business.
In India, the banking sector is featured by three-pronged competition: public sector banks, private sector banks, and foreign banks. While private and foreign banks are able to exploit emerging opportunities, public sector banks have done so in a limited way. This has been ascribed to their limited capital base, largely due to government ownership. To ensure the competitiveness of public sector banks, the government has to either divest or infuse additional capital.
Wherever government holding has already been diluted to 51%, any further divestment would mean privatisation, which has been opposed by bank employees and some political parties. Considering this, the State Bank of India chairman recently proposed the issue of golden shares to the government.
The case is well made. By virtue of golden shares, the voting powers of government, particularly veto power on issues of strategic importance, remains undiluted. However, private investors expect banks not only to maximise their profit, but also free themselves from government interference.
Historically, banks have been the conduit of monetary policy. In this present scenario, given the three-pronged competition, Reserve Bank of India has to rely on public sector banks to give effect to its policies. In other words, loss of control over the banking system by diluting government ownership will lead to surrogating the country?s economic interests to the profit-making interests of banks.
This leads to another question: is it viable to issue golden shares with a view to retaining government control but allow these banks to raise capital concurrently? If so, it will bring about a clash between the government and other stakeholders; the government?s concern is to make banking an effective conduit of monetary policy, whereas that of other stakeholders is to make profit. The objective of using a system to implement economic policy need not be consistent with the wealth maximising objective of private investors. The issue of golden shares will, therefore, complicate governance of these banks rather than provide them proper direction.
As long as banks are owned by the government, the main concern of these banks should be to ensure the achievement of economic policy. If inclusive growth is the political priority, then these banks should devise ways to give effect to financial inclusion. They must not be excessively worried about M&As, which corporates will always find ways to finance.
This is not to suggest that public sector banks should be confined to ?traditional? businesses. Exploiting emerging opportunities is fine, but that should not bring contrasting objectives into the boardroom. Either privatise these banks completely and let the country face the consequences of loss of control or let these banks with government ownership perform their role in line with national priorities.
Viewed against this, the issue of golden shares is not a viable option; it will not contribute to improving the system. In fact, such an experiment was found to be a futile exercise during Thatcher?s privatisation drive in the 1980s. Should we emulate policies that have failed elsewhere?
?The writer teaches at Icfai business school, Bangalore