New Delhi, Feb. 22: The Reforms Express has begun to roll. Days before presenting the budget, finance minister P. Chidambaram came out with a notification giving state-run banks the freedom to buy domestic and foreign banks, merchant bankers and finance corporations without having to seek government approval.
The move is seen as an indication of the Congress-led government's resolve to push ahead with the reforms that ran into a gridlock last year in the face of strong opposition from the Left allies.
'This (decision) is just too bad. We shall move against this... it now looks as if the government will also raise the cap on foreign direct investment in the banking sector,' said Gurudas Dasgupta, CPI leader and chairman of the All India Banking Employees' Association.
The government has been planning to introduce a swathe of reforms that includes permission to foreign banks to hold up to 74 per cent of the equity in private banks, raised from the current level of 49 per cent.
It also intends to increase foreign investment limits in other areas like construction, media and retailing and cut subsidies, besides streamlining the public distribution system.
The notification issued today allows banks to recruit top professionals and pay them fancy salaries if they so want. Earlier, the wage ceilings in the state-owned banking industry had led to an exodus of top professionals to foreign and private banks.
The new-found freedom will allow public sector banks to stem the outflow and even wean away talent from competition.
Government-owned banks will be allowed to decide independently on staffing pattern, recruitment, placement, transfer, training, promotions and pensions.
There is, however, a rider. This freedom is being extended only to those banks that have been making profits over the last three years, have adequate capital, a low portfolio of bad loans and at least Rs 300 crore of own funds.
The powerful bank employees' union, which is led by the Left, the reins now resting in Dasgupta's hands, has long been worried that mergers, buyouts and branch closures which such a notification might entail could mean loss of seniority for many and large-scale transfers.
On the contrary, the government believes the freedom it has granted today will allow public sector banks to carry out mergers and create bigger entities capable of taking on international and private competition.
Bankers were ecstatic. 'With the freedom we will be able to beat private banks any day,' said B.D. Narang, chairman of the Oriental Bank of Commerce, an aggressive and highly profitable Delhi-based bank.
Although the trade unions were angry, the stock markets whooped with joy. Bank stocks soared and the Bombay Stock Exchange Bank Index surged 1.6 per cent.
'With this, I expect our public issue to outperform our previous expectations. Foreign investors in particular can be expected to pump more funds into the banking sector now,' said Narang.
Twenty-seven state-run banks account for about three-quarters of all commercial banks' assets in India.
Many of them like State Bank of India and Punjab National Bank are seen as viable competitors to large multinational banks that are waiting to widen their footprints in the booming Indian financial market.