Public sector banks that continue to occupy a pivotal position in the Indian financial sector have reasons to be upset over recent circulars of the Union Finance Ministry which, they say, are an attack on their autonomy. The banks’ specific allegation is that over the past year, the government has been trying to “micro-manage” them by issuing as many as 36 directives setting new rules as well as reiterating existing ones. All of these, it is claimed, impinge on their freedom to take independent decisions even in areas that are considered very basic. The reform of the financial sector in the 1990s hinged on a fundamental compact: new private players were to be let in but an effort would also be made to ensure that the PSBs were equipped to take on the resultant competition. One of the important measures in that regard was the conferment of autonomy on public sector banks so that they could take commercial decisions independent of the government, which remains their largest shareholder. The extent of such autonomy has varied from bank to bank but in all cases it was hoped that the government would respect their autonomous status. The advent of new shareholders has further strengthened the case for autonomy.
The arrangement between banks and the government is tilted towards the latter. It calls for very seasoned bureaucrats to draw a line between exercising rights that arise out of majority ownership and those that are regulatory in nature. Obviously it would be desirable if the government sticks to policy making and allows banks the freedom to take decisions in an increasingly competitive environment. Reserve Bank governor D. Subbarao and his predecessor, Y.V. Reddy, have come out on the side of the banks. Micro-management is bad for banks and, in the long run, hurts the interests of the major shareholder, the government too. Of course, minority shareholders suffer the most and in these days of shareholder activism the government should not risk antagonising them. As Dr. Reddy has argued, the government should demonstrate exemplary corporate governance by exercising its ownership rights through its nominees on the boards of banks. The developments in the banking sector have a bearing on the government’s dealings with top-notch public sector enterprises. In their case, autonomy has been sanctified by signing MOUs, the conferment of navratna/maharatna status and so on, which basically expand the administrative and financial powers delegated to them. So, not just banks but a much larger constituency would be interested to know how the new Finance Minister intends to find a way out of this entirely avoidable area of friction.