MUMBAI, February 23: The Indian Banks' Association (IBA) has called for 100 per cent divestment of the government stake in public sector banks. The bankers' body has advocated total privatisation of weak banks and mergers and acquisitions as a strategic move for consolidation in the industry as smaller banks will not be able to survive competition. It is also in favour of working out an "exit route" to reduce the surplus staff in the industry.The IBA brass, led by chairman AT Pannir Selvam, met M Narasimham on Monday in Mumbai to formally present the association's agenda for the second stage of banking sector reforms. State Bank of India chairman MS Verma, Bank of India CMD MG Bhide and Bank of Baroda chief K Kannan met Narasimham to represent the industry's point of view.
Chiefs of financial institutions also met Narasimham, the architect of banking sector reforms, during the day.Among other things, IBA has called for a "hands-off" policy from the finance ministry. The government should be involved onlyin macro management, leaving the micro issues to bank managements, with bank boards being given freedom to appoint top executives like chairmen-cum-managing directors (CMDs) and executive directors (EDs). The bankers' body is also in favour of evolving a model code of corporate governance for banks.
The other major recommendations of IBA include creation of an asset reconstruction fund (ARF) to take over the non-performing assets (NPAs) of banks at a discount, legal reforms (for loan recovery) and tax reforms (on provisioning for bad loans) to create an ideal environment to meet the needs of the banking sector.
The association has also demanded the abolition of the lead bank scheme and the phasing out of directed lending. It has also called for different capital adequacy ratios for different banks instead of the prevailing uniform CAR of eight per cent, market-related interest rates on cash reserve ratio (CRR), freedom to pay differential interest rates on term deposits and reschedulement of term loansfor purposes of reclassifying NPAs -- where warranted. IBA is against merger of strong banks with weak banks and banks with financial institutions. It is also not in favour of merger of regional rural banks with the sponsor banks. The association feels that four to five weak banks should be totally privatised and four to five strong bank should emerge in the post-merger scenario. Observers say this will fuel competition and break the dominance of the State Bank of India. The demand for mergers is in tune with the recommendations of the first report of the Narasimham panel which formed the bedrock of financial sector reforms. On the divestment of the government stake, the bankers body said: "It is suggested that the government stakeholding, now mandatory up to 51 per cent, may be removed. Banks should be allowed to access 100 per cent capital from public, either from domestic or international capital market. This will increase the accountability of banks to shareholders..."
IBA is in favour of allowing banksto access the international capital market to shore up the capital base. Foreign banks and institutions should be permitted to make equity investments in Indian banks and this will help upgrade skills, the bankers body has suggested. According to the association, the current level of eight per cent capital adequacy ratio is not sufficient to cover the increasing market risk and the rising size of the balance-sheet and hence banks should be allowed to raise capital in both tiers.
It has also called for liberal norms for overseas borrowings. The banks should be given freedom to borrow/invest funds abroad up to 100 per cent of their tier-I capital, it said.
Finally, the association has called for clipping the wings of the central vigilance commission. According to IBA, bank managements should look into the lending decisions and financial losses should not be ipso facto be considered malafide on the part of the officers.INSIGHT
The IBA has presented an astonishingly forthright wish-list for thesecond phase of reforms. The list presented to the Narasimham committee goes far beyond what has so far been thought of as pragmatic and feasible. The demand for 100 per cent privatisation, for instance, is surprising, coming from normally reticent public sector bankers, but represents their feeling that genuine change can only occur if Indian banks are freed from all government control. The demand for a "hire and fire" policy is yet another example.
The list of suggestions has one common focus -- the necessity of Indian banks to be completely free to determine their own policies in order to compete in the new liberalised environment. The other recommendations, such as legal reform, are also aimed at this objective.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
