India Should Cuts Stake to
Below 50% in Banks, Says RBI Panel
The Indian government should cut its stakes in
state-controlled banks to below 50 percent, a Reserve
Bank of India-appointed committee said in a sweeping set of recommendations to
improve competitiveness and governance at the companies. Ownership stakes in
private-sector lenders should be allowed to increase, the panel also said.
Government holdings in state-controlled lenders
should be transferred to a new bank investment company, and the RBI should be
the sole regulator for the state banks, the committee said on 12 May in its 111-page report, which was
released on the website of the Mumbai-based central bank.
India’s public-sector banks have lower
profitability and productivity ratios than their private-sector counterparts,
the report said. State-controlled lenders have lost “significant” market share
and their asset quality is “much weaker, in some cases worsening to grave
proportions,” it said. Shares of the state banks have under-performed
private-sector competitors.
“The financial position of public-sector banks is
fragile,” the report said. It is “unclear” that the boards of most of these
banks “have the required sense of purpose, in terms their focus on business
strategy and risk management, to steer the banks through their present
difficult position.”
The CNX PSU Bank Index of state-controlled banks
has gained 53 percent over the last five years, while
the S&P BSE Bankex Index of mainly private-sector
lenders has advanced almost 150 percent.
Reducing government ownership below 50 percent would be a “beneficial trade-off” because the
government would continue to be the dominant shareholder in its banks and such
a step “would create the conditions for its banks to compete more
successfully,” the report said.
State-controlled lenders, which account for more
than 70 percent of India’s outstanding
loans, have historically been under-capitalized relative to privately owned
peers as a 51 percent government ownership
requirement curbs the scope those banks’ have to raise capital by selling
shares. This in turn limits their capability to boost lending, or requires the
government to inject cash into the banks.
The report covers 27 state-controlled lenders. The
committee was led by P. Jayendra Nayak,
the former chief executive of Axis Bank Ltd. and former India country head of
Morgan Stanley.
This isn’t the first committee appointed by RBI
Governor Raghuram Rajan to
make bold proposals. In January, an RBI panel recommended the central bank
adopt a 4 percent consumer-price-inflation target in
setting interest rates.
The outgoing government of Prime Minister Manmohan Singh pledged to inject 112 billion rupees ($1.8
billion) into state-controlled lenders in the fiscal year that started April 1,
a 20 percent drop from the previous year.
Bad loans have climbed to a six-year high as red
tape stalled projects amid delays in acquiring land, obtaining environmental
clearances and graft allegations. Soured advances rose to 4.2 percent on Sept. 30 from 3.4 percent
in March, RBI data show.