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RBI wants to divest stake in banks, FIs

BS Banking Bureau

The Reserve Bank of India has decided to transfer its ownership in the State Bank of India, the National Housing Bank and the National Bank for Agriculture and Rural Development to the government. RBI also plans to transfer its ownership in other financial institutions.

The move is triggered by the fact that RBI wants to inject competitive impulses in the financial sector. This is also in conformity with the regulatory and prudential considerations.

In its annual report for 2000-01, the apex bank said retaining the ownership structure of the regulated / supervised institutions engenders moral hazard with systemic implications.

Market observers point out that there could be potential conflicts of interest between the RBI's role as owner of these banks / institutions and as the supervisory authority for the banking system. Divesting its holdings would clip the problem, they added.

The report also says that RBI's holdings in the Discount and Finance House of India and the Securities Trading Corporation of India would be completely divested during the current financial year.

The RBI has been harping on the issue of divesting its holdings in some of the institutions for sometime now.

However, the Centre's response to the proposal seems to be lukewarm. For instance, even though the central bank has made it clear that it wants to divest its holding in SBI, the government is going slow on amending the SBI Act without which the SBI cannot broadbase its holding pattern.

FI financials draw frowns

The Reserve Bank of India has expressed concerns over the activities of domestic financial institutions.

The net non-performing assets ratio of a few FI majors has increased sharply. This is accompanied by a deterioration in the capital adequacy ratio and the ratios of net outstanding borrowings to net owned-funds, the RBI annual report said.

In view of these developments, the apex bank has said that the implementation of the recommendations of the second Narasimham Committee and "an unambiguous signal of the strengthening of the regulatory framework for the DFIs assumes critical importance".

The central bank's observation is to be seen against the backdrop of the problems faced by two state-run DFIs -- Industrial Finance Corporation of India and Industrial Development Bank of India.

ICICI made huge provisioning to bring down its NPAs in fiscal 2001.

The government has recently cleared a Rs 10 billion bailout package for IFCI. The Centre will pump in Rs 4 billion, while the rest will be brought in by IDBI, State Bank of India and other promoters.

IDBI itself may also join the queue of sick institutions in the next two years if the Centre and state guarantees of more than Rs 11 billion are not honoured.

The second Narasimham Committee (1998) had recommended the conversion of DFIs into either commercial banks or non-banking finance companies so as to improve their regulation especially in the context of the move towards universal banking.

All these institutions are in the process of charting out a migration path. ICICI has said that it would like to become a bank over the next 12-18 months, while IDBI is in the process of formulating the blueprint to become a bank.

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