This is in continuation of the previous blog post on a Hundred Small Steps where I analyze the 2008 Planning Commission Report prepared by RBI Governor Raghuram Rajan.
Proposal 6: Liberalize the interest rate that institutions can charge, ensuring credit reaches the poor, but require (i) full transparency on the actual effective annualized interest cost of a loan to the borrower, (ii) periodic public disclosure of maximum and average interest rates charged by the lender to the priority sector, (iii) only loans that stay within a margin of local estimated costs of
lending to the poor be eligible for PSLCs.
"The Committee believes that through a combination of transparency, incentives, and eventually competition, liberalized interest rates to the poor can be kept within reasonable limits, and liberalization would enhance, and improve the sources of, credit to the poor."
--I think this has been pretty much incorporated into the system barring the clause that banks borrowing money from the RBI's credit line for lending purposes, have to charge a rate mandated by RBI.
Proposal 7: Sell small under performing public sector banks, possibly to another bank or to a strategic investor, to gain experience with the process and gauge outcomes.
--Disinvestment has been an ongoing theme with the present government as it was with the previous. However, under performing PSUs have not met attractive stock valuations and this would be a concern. The merger of these under performing PSU banks with some of the larger PSU banks could potentially give the government a better chance at getting attractive valuations in public offerings of these PSU banks. The merger could be in the form of a majority / controlling stock holding by a larger PSU bank.
Proposal 8: Create stronger boards for large public sector banks, with more power to outside shareholders (including possibly a private sector strategic investor), devolving the power to appoint and compensate top executives to the board.
--Considering that these boards are majority governed by the members of the public services (such as IAS), this would be very contentious proposal. Whilst the board has to be share holder appointed, the public sector companies in India are unique in the sense that they are built by and run by the government and not private enterprise. Hence the implementation of this proposal could face significant opposition from the stakeholders.
Proposal 9: After starting the process of strengthening boards, delink the banks from additional government oversight, including by the Central Vigilance Commission and Parliament, with the justification that with government-controlled boards governing the banks, a second layer of oversight is not needed.
--This would lead to a full fledged privatization of the PSU banks and would not confer any benefits to the PSU banks on the face of it. At present, government is able to infuse large amounts of cash into these PSU banks for priority sector lending and this option would not be available once the banks are fully privatized. These cash infusions are announced during the annual budget speeches.
Proposal 10: Be more liberal in allowing takeovers and mergers, including by domestically incorporated subsidiaries of foreign banks.
--Foreign ownership in the banking sector has been limited to 49% as per the latest budget speech. The overall trend here is in the direction of more liberalization of policy. Full liberalization of FDI regime might take significant more time going by present trends.
Proposal 6: Liberalize the interest rate that institutions can charge, ensuring credit reaches the poor, but require (i) full transparency on the actual effective annualized interest cost of a loan to the borrower, (ii) periodic public disclosure of maximum and average interest rates charged by the lender to the priority sector, (iii) only loans that stay within a margin of local estimated costs of
lending to the poor be eligible for PSLCs.
"The Committee believes that through a combination of transparency, incentives, and eventually competition, liberalized interest rates to the poor can be kept within reasonable limits, and liberalization would enhance, and improve the sources of, credit to the poor."
--I think this has been pretty much incorporated into the system barring the clause that banks borrowing money from the RBI's credit line for lending purposes, have to charge a rate mandated by RBI.
Proposal 7: Sell small under performing public sector banks, possibly to another bank or to a strategic investor, to gain experience with the process and gauge outcomes.
--Disinvestment has been an ongoing theme with the present government as it was with the previous. However, under performing PSUs have not met attractive stock valuations and this would be a concern. The merger of these under performing PSU banks with some of the larger PSU banks could potentially give the government a better chance at getting attractive valuations in public offerings of these PSU banks. The merger could be in the form of a majority / controlling stock holding by a larger PSU bank.
Proposal 8: Create stronger boards for large public sector banks, with more power to outside shareholders (including possibly a private sector strategic investor), devolving the power to appoint and compensate top executives to the board.
--Considering that these boards are majority governed by the members of the public services (such as IAS), this would be very contentious proposal. Whilst the board has to be share holder appointed, the public sector companies in India are unique in the sense that they are built by and run by the government and not private enterprise. Hence the implementation of this proposal could face significant opposition from the stakeholders.
Proposal 9: After starting the process of strengthening boards, delink the banks from additional government oversight, including by the Central Vigilance Commission and Parliament, with the justification that with government-controlled boards governing the banks, a second layer of oversight is not needed.
--This would lead to a full fledged privatization of the PSU banks and would not confer any benefits to the PSU banks on the face of it. At present, government is able to infuse large amounts of cash into these PSU banks for priority sector lending and this option would not be available once the banks are fully privatized. These cash infusions are announced during the annual budget speeches.
Proposal 10: Be more liberal in allowing takeovers and mergers, including by domestically incorporated subsidiaries of foreign banks.
--Foreign ownership in the banking sector has been limited to 49% as per the latest budget speech. The overall trend here is in the direction of more liberalization of policy. Full liberalization of FDI regime might take significant more time going by present trends.
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