The Telegraph
Since 1st March, 1999
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Holding firm structure for banks floated

New Delhi, Dec. 6: A strategy paper prepared for finance minister Jaswant Singh by his aides in the ministry recommends the establishment of holding companies that will run state-owned banks “pending privatisation.”

The policy note, which has been circulated to key officials in the government, says the banking division within the ministry should be relieved of the job of governing PSU banks. Instead, multiple, competing ‘holding companies’ could run the clutch of 27 banks the government owns, “pending privatisation.”

The finance ministry wants to come out with a roadmap for privatising PSU banks. Officials said this may not be difficult as the government has accepted the Narasimhan Committee report that government equity in PSU banks can be reduced to 33 per cent.

State-run banks are already reducing the percentage of the government’s stake by making public offerings, though most of these issues are currently targeted at meeting capital adequacy norms and not to truly reduce government control, which remains quite firm.

Politically, the note could be a bombshell as it will meet stiff resistance from within the BJP where a raging debate on how to go about disinvesting PSUs has just been laid to rest. PSU banks dominate the banking scene in the country accounting for roughly 80 per cent of the total business. They have an asset base of over Rs 5 lakh crore. Any move to hand over these cash rich banks would not go down well with politicians concerned about its impact on an electorate already jittery because of various reform measures.

The Opposition, led by the Congress and the Left, are also not particularly happy with the idea. “Selling PSU banks will achieve what bank nationalisation under the Congress regime aimed at destroying—concentration of monopoly financial power in the hands of a few. In any case, it would be a cruel joke as the bidders, if they are Indian entrepreneurs, are likely to be defaulters to those very banks,” said CPM leader Nilotpal Basu.

The finance ministry note also wants to reduce the “vulnerability of banks to Central Vigilance Commission/ Comptroller & Auditor General of India’s inquiries” through “administrative measures.”

The note argues that this will improve the willingness of banks to fund investment. Industry chambers have been arguing that bankers show a marked reluctance to funding investment as they are hemmed in by various rules which disallows them mobility in decision making.

This, of course, may turn out to be yet another controversial move as Parliament in the past has shown its keenness in ensuring PSUs are properly audited by the CAG as it is a statutory body which reports to Parliament. Top ministry officials say it would be difficult to sell the idea of selling off PSU banks to strategic shareholders who will run the bank as the government remains sensitive on the issue, unless its a case of a PSU bank which is reporting sick.

But right now the three PSU banks which had run into difficulties have revived and such arguments may not be politically palatable. Officials said if the move is accepted by the Cabinet, the government could allow foreign banks and financial institutions to be among stakeholders allowed to buy small pocket holdings in the PSU banks.

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