Will Yashwant Sinha play it safe

Updated: Feb 9 2002, 05:30am hrs
The union budget which is to be placed before the nation three weeks from now cannot escape the overhang of financial sector scams. The dramatic exposure of the most trusted public mutual fund, Unit Trust of India, was but one in a series of crises in the financial sector in the past one year. Another notable one, to refresh ones memory, was the so-called Ketan Parekh affair, which revealed the banks-stock market nexus. And then there were reports about none too prudential, and allegedly dubious, lending by other financial institutions and banks. Though the crises prompted restructuring of the institution involved, viz the UTI, the need for restructuring other FIs and public banks has also come to the fore. The debate, as far as financial sector restructuring is concerned, is no longer about whether but more about how. So what options does the finance minister have at this juncture

As far as restructuring is concerned, it is evident that the gradual privatisation formula favoured for public sector banks has not really delivered the expected results. In 1994, public banks were allowed to access capital markets through dilution of the governments shareholding to 51 per cent. Increased capital adequacy standards and the governments limitations in meeting the additional capital requirements, rather than any real desire to restructure, prompted this. By 1998, only nine public banks (out of 20) had accessed the capital market to augment their capital base. In 1997, banks were allowed to access capital markets abroad through issuing global depository receipts, as part of capital account liberalisation. But only one public bank, the State Bank of India, could raise resources through this mechanism. By 1998-99, the maximum reduction in shareholding of government in a public sector bank was 66 per cent whereas the law allowed dilution down to 51 per cent! This indicated the lack of enthusiasm of investors in these institutions.

Another attempt in 2000 diluted public ownership to a further 33 per cent, but with the caveat that no individual shareholder could hold more than 1 per cent of the shares. This effectively ensured that the public sector character retained its purity. By March 2001, only 11 public banks were listed for trading on the national stock exchange. The shares of the top five banks accounted for 95 per cent of the turnover of the entire bank shares at the stock exchange. Noting that stock market activity is essentially driven by a firms fundamentals, this summarises the outcome of the incipient privatisation that has been attempted so far.

Considering that privatisation is out of question and closure of any public sector bank is ruled out as well, what could be another route to restructuring The presently most favoured route, to my mind, appears to be a serious push towards instituting corporate governance in public banks. Corporate governance did not really crop up in the financial reform agenda until 1998 when inadequate/inefficient management was identified as one of the key problems associated with bank performance. Since then, however, considerable spadework has gone into examining its relevance and defining the contours for the Indian financial sector as a whole.

In 2000, the Advisory Group on Banking Supervision (M S Verma) suggested that all banks should accept a certain minimum level of corporate governance and develop mechanisms for ensuring percolation of corporate strategic objectives throughout the organisation. More pertinently, it examined the issue of ownership in establishing corporate governance practices and concluded that the two were mutually distinct. Public ownership was not necessarily incompatible with corporate governance. In 2001, an Advisory Group on Corporate Government (R H Patil) urged quick reforms to make the boards of these institutions more professional and truly autonomous. More recently, the central bank has been stressing the need for adopting best practices in the public sector banks to improve functioning.

Laws supporting or facilitating corporate governance, however, are yet to take shape though the Patil advisory group pointed out that the framework for corporate governance was already provided for in the Companies Act, which needed to be amended accordingly to enforce good governance practices. Until these are enacted and implemented, it is doubtful whether good management practices can be institutionalised across the spectrum in public sector banks. One may also note in passing that legally, public banks can be converted to companies as and when the governments shareholding goes below 50 per cent.

The debate on this is gaining momentum indicating the importance of the issue in financial sector reforms. These trends indicate that restructuring of boards to incorporate accountability and responsibility principles is the most acceptable option to the government, as it abstracts from the contentious issue of ownership that is politically difficult to achieve. We may therefore expect some movement on this front in the forthcoming budget.

Another issue that might feature is that of non-performing assets. Any observer of the financial sector will be aware of not just the extent of the problem, but the remarkable lack of success in all initiatives undertaken on this front so far. To start with, a fast track recovery mechanism was favoured over the asset reconstruction fund/company options suggested by the respective Narasimham committees. The debt recovery tribunals were an offspring of this policy response. But the outcome has been none too promising. At last count, the Reserve Bank in its last monetary policy statement, placed the onus upon the banks to devise their own schemes and policies for recoveries and write-offs. While this should propel respective managements to address this issue in a bank-specific manner instead of a one-size-fits-all approach, it is likely that the government may complement this with strengthening the legal process further through necessary legislation. Or it may be that a once-and-for-all resolution to the problem may be favoured as the advantages of a clean slate are all too evident.

The author is a professor at ICRIER and on deputation from RBI. The views expressed here are personal and not of the institution to which she belongs