2005 — after the initial euphoria, the Congress found resumption of the reform process which it had initiated in 1991, was being opposed by their electoral allies in every sphere.
Disinvestment came to a total halt and certain critical banking reforms for which Bills were introduced in Parliament within a year of the government coming into power, has also been languishing in cold storage.
One of the proposed changes was to amend Section 12(2) of the Banking Regulations Act to provide for the share capital of banks to be structured in the same manner as that of an ordinary company, and remove the cap which restricts voting rights to 10 per cent irrespective of equity holding.
This issue had been referred to and deliberated by a Parliamentary Standing Committee with the Finance Ministry, various public and private sector banks expressing their support.
To understand how this came about, one has to go back three decades to the nationalisation of Indian private banks, which was based on certain extraneous considerations other than financial. In 1969, fourteen of the largest commercial banks in India were nationalised followed by six more in 1980.
Foreign banks, which were already operating in India, were permitted to continue. Initially, this did serve consumer interest, and till 1990, the growth was around 4 per cent. This “ four to six” figures were true of borrowing and lending rates as synonymous with the actual working hours
The ostensible objectives of bank nationalisation was to extend banking benefits to the under-privileged – credit expansion in rural and semi-urban areas, and providing depositor confidence, were laudable.
In reality of course, it was a tactical tool successfully manipulated by Mrs. Gandhi in her struggle against the Syndicate. That does not detract the achievements in terms of expansion, but these were eventually overshadowed by the overall deterioration in service and efficiency, drop in profits, and the crony capitalism leading to misuse of funds at the behest of political bigwigs, in utter disregard of banking ethics.
Competition ebbed, loans were blatantly waived and non-performing assets added up alarmingly on Banks’ balance sheets. Fiscal deficit was burgeoning and balance of payment situation highly critical. The time had come to move on ,evolve and integrate with the global economy, or “live like Cuba”.
In early 1990s, the Congress Government initiated bank reforms by giving licences to a small number of private banks. This was the kick-start of the evolution and growth of the banking sector in India with a combination of all three structures: foreign banks, government banks and private banks.
It is in this context — changes in the 1990s, on the two Narasimham Committee reports banking reforms were implemented. And this happened at a time — 1992 and 1998, when several winds of change were blowing. The software and telecom revolutions had started – connectivity and technology reduced the need of physical banking presence.
Policy decisions were taken that there would be no more nationalisations and the first private Indian Banks, ICICI Bank, HDFC Bank kick-started a new era of banking. India woke up to new products, saving instruments, loans and mortgages ,all attractively packaged. Exciting areas like M&A, takeovers, asset sales, hitherto, the exclusive domain of Chartered Accountants and attorneys became part of banking core competence.
Thanks to SARFAESI, Indian banks both public and private, have cleaner balance sheets, are stronger, confident in facing competition. In this context, it appears unrealistic that a business such as banking should be subject to such stringent norms.
Given the transparency requirements banks have to operate under, compliance with the KYC guidelines, anti-money laundering declarations and the increasing role of corporate governance, the banks would be obliged, as all listed companies are to provide transparency to investor information.
In this scenario where FIIs and Mutual Funds form a significant component of the banking and capital market systems, the removal of the 10 per cent restriction will enable banks in raising more capital.
And the ceiling sought to be removed is applicable not just to foreign investors – it applies to all shareholders and operates as limitation on the fundamental rights to carry on business – there being no rationale for retaining it when no other sensitive sector has similar restrictions. It appears that the bogey is nothing but the Left’s obsession with privatisation and the red flag of FDI.
Kumkum Sen is a Partner in Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com
