For Congress-led govt, too much of unfinished task

FINANCIAL SECTOR

The UPA government has failed to push through key reforms in the financial services sector. Among the policy issues put on the backburner are lifting of the voting rights cap in the banking sector and raising the foreign direct investment (FDI) ceiling in insurance.

The government took some initial steps for consolidation among public sector banks and moves were afoot to make a beginning by merging Bank of India and Union Bank of India. The government, however, got stuck subsequently in the stumbling blocks put up by the Left parties.

The finance ministry was even considering providing foreign banks a greater leeway in private sector by allowing them to acquire stakes in a phased manner. The government considered allowing foreign players to raise their equity stakes in Indian private sector banks in phases of 10 per cent.

The unfinished task has the potential of completely changing the face of Indian banking. These radical policy reforms are unlikely to happen in the remaining two years of the UPA government's term given the political compulsions it is operating in.

Another policy initiative facing a roadblock is the Pension Fund Regulatory and Development Authority Bill, which seeks to introduce a new pension system where the beneficiary would be making a defined contribution. The central government has already decided that all its employees who have joined after January 1, 2004 would be part of the new pension system.

The major policy measures taken by the government are the amendments to the Banking Regulation Act, The Reserve Bank of India Act, the State Bank of India Act and the SBI Subsidiaries Act.

Apart from removing the floors for maintaining of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) by banks and giving the RBI the freedom to decide the minimum, banks have been allowed to issue preference shares. The provision to allow banks to issue preference shares has come as a big boost to public sector banks.

Another positive for SBI subsidiaries is the provision that allows them to make preferential allotment of equity shares. Other public sector banks are still to get the preferential allotment leeway.