Report on Banking Policy

["Premkumar S. Rallabandi" <psr3855@unix.tamu.edu>]

Hi People: I have been over-hearing the interesting discussions going on
on this forum. I have not been able to participate for a lot of reasons,
both personal and professional. Just wanted to write a note to encourage 
all those who are writing here; it's been quite an educational experience
so far - keep writing people!
Also I wanted to draw your attention to a report in Indian express about
recommendations of Narasimham Panel regarding Banking reforms. Thought it is
appropriate to post the article here. If any of you would rather read it on the
web itself, you can visit this website: 
http://www.expressindia.com/fe/daily/19980423/11355554.html

Prem.

                      Thursday, April 23, 1998 

       Narasimham panel may advocate lowering government stake in banks below 
50%  

  Mumbai, April 22: The Narasimham Committee on financial sector reforms will
submit its report to the finance ministry on Thursday. Sources close to the 
committee say the panel is believed to have recommended the dilution of 
government stake in nationalised banks to below 50 per cent.

  The other major recommendations of the committee, headed by former RBI 
governor M Narasimham, and head of the Hyderabad-based Administrative Staff
College of India, may include:

     Promoting consolidation of the banking industry through mergers and
             amalgamations (M&As);

     Separating the Reserve Bank of India's (RBI) role as the country's monetary
             authority from that of a regulator of the banking system;

     Reducing the 40 per cent stipulation of priority-sector lending;

     Creating an exit route for surplus staff in the banking industry; and

     Setting up an asset construction fund (ARF) for the recovery of the banking
             sector's non-performing assets (NPAs).

  Some of the suggestions are similar to the onesmade by Narasimham in an 
earlier report submitted in 1991 to the then finance minister Manmohan Singh. 
The Narasimham committee, in its second avatar, was constituted by former 
finance minister P Chidambaram to set the agenda for the second stage of 
financial sector reforms. The deadline for submitting the report, which expired 
on March 30, was extended by a month as Narasimham had fallen ill.

  According to sources, the panel wants government stake to be diluted to less 
than 50 per cent in order to make banks' decision-making more autonomous. "It
could be even 26 per cent -- a prescription suggested by the Disinvestment 
Commission for some of the public-sector undertakings," sources said.

  The panel also considered the idea of issuing a "golden share" under which thenominal government stake would be low -- one per cent -- while giving it a 
higher effective stake. "It did not find favour with the committee as, in the 
domestic context, the idea behind a reduction in government stake is to free 
bank employeesfrom being treated as "public servants." Instead, by directly 
reducing the government stake below 50 per cent, the banks will be free from 
the shackles of the central vigilance commission," sources said.

  The Indian Banks' Association had, in its memo to the committee, called for 
100 per cent divestment of the government stake. "Banks should be allowed to 
access 100 per cent capital from public, either from the domestic or 
international capital markets.  This will increase the accountability of banks 
to shareholders..," it had said in its presentation to the panel.

  The bankers' body also advocated M&As as a strategic move for consolidating 
the industry as smaller banks would not be able to survive competition. 
"Even the first Narasimham panel report had made recommendations in favour of 
mergers in the banking sector. It had also called for fine-tuning the role of 
the RBI, reducing the priority sector lending target and the creation of ARF. 
These were, however, not accepted. It needs to be seen whether these
recommendations find favour with the BJP-led government," a senior banker said.

  The committee is also believed to have pressed for a dilution in the role of 
the finance ministry -- leaving micro issues to bank managements and 
concentrating only on macro management. "It has a sharp focus on the autonomy 
of banks," a source said.