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Business
FINANCIAL SCENE
FM’s exhortation sparks debate
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Government’s role in banks’ working comes into focus
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The speed at which leading banks have acted on Chidambaram’s exhortation reminds one of an earlier era of Government control.
At a recent joint meeting of senior executives of the auto industry and chairmen of banks, Finance Minister P. Chidambaram urged the latter to find ways to lower the cost of their resources and pass on the benefit to the borrowers. That advice, highlighted in the business press, has been construed as a diktat from the Finance Minister to banks. This perception was reinforced by a subsequent report that senior executives of a few public sector banks have with alacrity agree
d to comply.
On October 10, State Bank of India lowered its interest rates on new home loans, car loans and truck loans. These loans will be cheaper by between 0.50 percentage and two percentage points. Other banks are expected to follow suit.
Perceived interference
Of the many ways of looking at these developments, the one that has received wide comment, views these as interference by the Government in normal commercial matters. The issue of government dictating what are essentially business strategies of banks should have been passe by now. As financial sector reform took hold, the Government was supposed to give up its powers to direct credit and control interest rates.
While remnants of the old dispensation remain — directions on priority sector lending continue while the savings bank interest rate is still fixed — banks by and large are free to determine interest rates whether on loans or deposits. Whether they are able to judiciously use that freedom or succumb to pressures is debatable.
Largest shareholder
The point that should not be missed here is that the Government is by far the largest shareholder in Indian banking, having a majority shareholding in all public sector banks. Earlier the Reserve Bank of India and not the Government had the majority stake in SBI but recently the Government bought over the RBI stake.
All these bring into sharp focus the Government’s role. Public sector banks including the SBI group still hold a dominant share of the banking business in the country although a few new generation private banks led by ICICI Bank and HDFC Bank are growing at a furious rate and snapping at the heels of well established PSBs.
The chairman of SBI, still the market leader, has talked of a loss of market share. Clearly there are handicaps. The injudicious use of authority by the Government is one. Human resources policies, especially clichéd expressions such as ‘risk-reward’ mechanisms, are hopelessly out of date in public sector banks. Then there is the looming vigilance, which conditions a PSB employee right from day one. Risk aversion is ingrained in a PSB.
Well meant call?
One should not rush to interpret the Finance Minister’s exhortation to banks as interference. Perhaps, in the given situation, banks needed to be told by some one like the Finance Minister. The situation should change in its entirety.
One earnestly hopes that bank chairmen will stand up for they believe to be in the interests of all their shareholders and the society at large. There are other shareholders in all PSBs. The voices will count more and more in the days to come. How will the majority shareholder and the bank managements reconcile their interests with those they think are of the society at large?
Relevance of action
The Finance Minister’s pitch for cheaper auto loans was made in the context of slackening automobile sales. A gradual tightening of interest rates by the RBI along with some new provisioning measures (for home loans) has made automobile and home loans more expensive. The auto industry has been one of the star performers in the manufacturing segment and is partly responsible for the robust growth of the economy.
However well meaning the Finance Minister’s exhortation might be, the fact remains that it is the RBI that signals interest rate movements. Past experience suggests that these signals need not be transmitted across the financial sector and into the real economy. Besides, sector specific reliefs (of the type given to exporters) should be the exception. Finally, in all this, who thinks about the depositor? On Thursday, SBI reduced its deposit rates under certain categories by 0.25 percentage point.
C. R. L. NARASIMHAN
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