There is a new twist to an old tale. The role of the government, the dominant shareholder in many banks, has come under scrutiny recently, and not for the right reasons. There are allegations that the government is using its special position to “micro-manage” banks and other financial institutions. Over the last year or so, the Department of Financial Services, which overseas banks among other entities, has sent as many as 36 directives to state-owned banks, setting new rules as well as reiterating old ones. It is the appropriateness of issuing such directives as much as the content of those that have invited criticism.
The person, at the centre of the news, D. K. Mittal, the financial services secretary, is, however, unfazed by the criticism. According to him, the intention is to jolt state-owned banks out of their “lazy banking habits and force them to lend more to small-scale and agriculture”. Those are words reminiscent of a bygone era. Rarely does one hear such statements, at least in public in the reform era.
It is common knowledge that the government has “influence” over the running of these banks — the public sector banks (or PSBs). Interference would be a more appropriate word. The fact is, given the ownership pattern of the PSBs, it will call for very enlightened finance ministry officials to desist from interfering. Ever since bank nationalisation (1969), the dividing line between government ownership and control has been thin in many cases.
After all, the government takeover itself and the social control over banks that preceded it were sought to be justified on the ground that banks in India should expand their horizon to fulfil social objectives besides the usual commercial ones. Extension of banking services to semi-urban and rural areas through a record-breaking branch expansion programme — without a parallel anywhere in the world — was one outcome. Providing bank finance to agriculture and small scale sectors, on an extended and viable basis, has been another. In all these, of course, the government, at best, might have nudged banks but a lot of credit ought to go to the banks themselves in continually evolving schemes having a socio-economic content. But the government’s role in at least conditioning-sensitising — banks to lend to previously neglected areas cannot be denied.
Over the years, government support to banks has come in many tangible and non-tangible ways. At a very basic level, banks were provided with capital. Ensuring capital adequacy, however, has remained a challenging task even today as banks in India migrate to Basel III norms. But by far a greater contribution of the government comes from the fact that pubic ownership has been a great blessing in times of crisis. Some of the world’s leading commercial banks were “nationalised” in the U.S. and the U.K. after they got into trouble during the crisis. In India, Indian Bank could climb out of the hole only because it was owned 100 per cent by the government. Its customers had placed implicit faith on its owners than on the bank’s ravaged balance sheet. There was no run on the UTI-64 for the same reason.
Yet, even conceding that government ownership of banks has its plus points not only in India but in the West, too, does it justify government interference in areas which should be the domain of the banks’ board of directors?
RBI Governor D. Subbarao has said that the government should not micro-manage commercial banks. Y. V. Reddy, while making a similar point, has said that the operational autonomy of banks must be protected. The regulator should retain a firm hand on the tiller, he said in an interview. The government should demonstrate exemplary corporate governance by exercising its ownership rights through its nominees on the bank boards.
Further, the government should learn to respect the spirit of reform, which is to enable banks to operate on commercial considerations. Regulators should regulate but on no account should the majority owner dictate how the banks should be run.
The last point is important not only in the context of public sector banks but the whole gamut of government-owned companies. As has been with banks many of them, which were 100 per cent government owned, have divested a portion of their equity. The government, however, remains the majority shareholder. The operational autonomy that the government assiduously tries to confer on the PSBs and select government companies — through MoUs, according Navratna status and so on — has been elusive in many cases.
Which brings us to the point whether the top management of the government-owned undertakings, including banks, are doing enough to protect, if not enlarge the autonomy? Answers to that question will not be flattering to the top executives. After all, their career progression has depended entirely on the government. Their transfers — to a bigger bank or to a more senior position in the same institution — are all at the hands of the government. Even a casual observer cannot but notice how reticent top public sector bankers are to articulate their independent opinions on matters such as credit policy. Well informed criticism of public policies ought to be welcomed by everyone including the government. Maybe that is not how we interpret autonomy for public sector undertakings.
Developments in Coal India, where an activist minority shareholder is taking on the board of directors of the company for not protecting the interests of the minority shareholders, should be a sobering reminder. The hedge fund, the Children’s Investment Fund Management LLP, has threatened legal action over the alleged practices of Coal India that lowered its profits. Needless to add such practices are the outcome of government policy.