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Journalism of Courage
Instead of bold moves towards the denationalisation of banks, the Vajpayee government has opted for creeping privatisation at a glacial pace. This will not restore the banks to health. Seven years after the last attempt to lower government holdings in public sector banks, the cabinet has decided to take another cautious step forward and reduce government equity to 33 per cent. How far this will go towards liberating banks from the government can be judged by what happened after the first round of privatisation in 1994. Only a handful of banks were in a position to benefit from the policy change. Six out of 19 public sector banks raised equity in the market. For the rest, sick banks became sicker, the overall level of non-performing assets (a large proportion being loans to political cronies) remained high and services deteriorated steadily. No doubt the markets, hungry for good news, reacted positively to Thursday’s disinvestment announcement. This should not be taken as a salute to the boldness of the reformmeasures. Rather it is relief that there is some movement even though the bank unions are viscerally opposed to change.
Once it is seen that the new plan offers too little privatisation and too much government meddling, the markets may want to reassess their initial reaction. The heart sinks to hear officials explain that it is proposed to preserve the public sector “character” of divesting banks. The government wants it both ways, to have private investment but to retain management control itself and lay down internal policy and appoint directors to bank boards and the chief executive. The status quo will be preserved with political interference all down the line and no innovation, no improvement in customer services, no ability to respond quickly to market signals and improve the bottom line. Public sector banks will remain prisoners of the past. A closer look shows that the government’s perspective has not altered much over the last decade even as the banks are being exposed to more risks as well as opportunities. Little has been learned from the last cautious exercise in bank privatisation. The latest move does notarise out of a desire to carry reform further but has been forced upon the government by the fact that it is itself unable to recapitalise banks.
The aim is limited to allowing banks to raise their own resources in the capital market. However, only six banks took the plunge last time and not all of them divested to the permissible limit of 51 per cent. Will things be any different during this latest round of privatisation? Markets look at the underlying health of banks: the sound ones will find ready investors, the others are still going to need more injections of funds from the government before they can dress up their accounts and think of approaching private investors. But as has been seen already, recapitalisation by itself does not solve problems originating in the way banks are managed or rather, mismanaged. The answer is progressively to let market forces discipline banks and raise the level of efficiency. And the only way to do that is to reduce government control along with government ownership of banks.
