Indian banks under thumb of the State

The Indian plan to increase voting rights for shareholders in banks would improve management and corporate governance and draw more investment, but it falls short of lifting ownership restrictions or relinquishing the government's stranglehold on most lenders.

The government owns stakes of more than 50 per cent in state banks, which have a market share of 70 per cent and a bigger proportion of bad bank loans.
New Delhi's reluctance to shed some of those stakes leaves a big chunk of lending exposed to political interference.

“The biggest risk in India for banks is the political risk,” said Jurgen Maiar, a fund manager based in Austria with Raiffeisen Eurasien, which owns Indian shares worth $300 million, including stakes in public and private-sector banks.

Still, in what is seen as a positive step toward change, the Indian Parliament is expected to give approval soon to amendments to banking laws that include raising the limit on shareholders' voting rights in banks, in both the public and the private sectors.

However, the current parliamentary session, which ends September 7, has been paralysed by  a furor over a state auditor's investigation into coal block allocations, casting doubt over the timing of a vote on the bill.

Under the current law, a shareholder in a private-sector bank like HDFC Bank or ICICI Bank can exercise voting rights equivalent to a maximum of 10 per cent of the total shares, regardless of the size of the individual shareholding. The proposed law would increase the cap to the equivalent of 26 per cent in private-sector banks and to 10 per cent, from 1 per cent, in government banks like the State Bank of India.

“Higher voting rights will be good for investors,” said R K Bansal, executive director at the state-run IDBI Bank. “It will help banks raise capital from investors. But in public-sector banks where the government shareholding is high, it may not make much difference.” The proposal on voting rights was an important factor in a two-day strike last week by a million bank workers, mostly from state banks, who oppose the government's ceding any control.

“The government is trying to increase the influence”' of multinational corporations over banks in both the private and the public sectors, said Vishwas Utagi, secretary of the All India Bank Employees Association. “It's a threat for the banking sector and the country.”' Left unchanged in the proposal is the limit on any single investor's owning a minority stake of more than 5 per cent in an Indian bank, or 10 per cent with central bank approval.

The limit has deterred investment in an industry in need of capital to meet stricter reserve requirements for banks under the global rules known as Basel III.
Advocates of change say the increase in the voting rights limit should be followed by other long-pending measures, including cutting the government's holding in public-sector banks and issuing new bank licenses. The last time a new bank license was issued to a private firm was in 2004.

The government proposed in 2010 to issue more licenses in a bid to expand access to financial services in a country where more than half the people in a population of 1.2 billion do not have bank accounts.

“To attract new foreign investment, you will have to open the sector more,” said Walter Rossini, a portfolio manager in Milan for Gestielle India, which manages $200 million.
A government panel recommended in 1998 that New Delhi reduce holdings in state banks to 33 per cent from more than 50 per cent. The government’s resistance to ceding its majority stakes was reinforced by the 2008 global financial crisis.

Doing so would help banks tap local and overseas markets to raise money to meet the tougher capital requirements and improve op capital requirements and improve operational performance, analysts say.

The Reserve Bank of India, the central bank, estimates that state banks need to raise about 4 trillion rupees, or $72 billion, of equity to meet Basel III capital rules by 2018, meaning that the deficit-laden Indian government might ultimately have little choice but to sell down some of its bank stakes.

Government dominance of state banks often leads to political pressure to lend to favoured borrowers, including farmers. The government has also been using ownership clout to influence operations, including loan pricing and the granting of loans in particular sectors.