Monday, May 07, 2007

Mulling over government owned banks

The question of public ownership of banks has long been a political hot potato. However, the consensus of experts has steadily shifted towards discomfort with public ownership. As S. S. Tarapore points out (see the file by him on the MIFC web page), the Narasimham-2 report and the Tarapore-2 reports have endorsed a shift away from government ownership of banks. The MIFC report is also on that line of thought. This makes three prominent government committee reports which question PSU banking.

Today, the front page of Indian Express has a depressing story about career politicians being appointed on the board of directors of PSU banks (also see this). It is hard to see how such appointments are not consistent with rent seeking behaviour, and with a loss of competitive strength on the part of PSU banks. Update (8/5): See the edits on this in Business Standard and in Indian Express. These developments are perhaps not as significant as the Indian Express story makes them out to be, for they probably only convert the de facto into the de jure.

Poor management of PSU banks hurts the economy because of the important role that PSU banks play in Indian finance. The harmful effects of government ownership of banks would be much smaller if the market share of PSU banks was much smaller than 75%. As I have emphasised, the really damaging problem is the lack of competition in banking. A sound framework of banking regulation could yield an outcome like that which has been seen in mutual funds, airlines and telecom, where big privatisations did not take place (other than VSNL), but the privatisation issue has clearly faded in significance. In this sense, the real weakness lies in RBI's entry barriers, and not in Parliament's unwillingness to amend the Bank Nationalisation Act. If RBI were able to emulate SEBI on mutual funds, or TRAI in telecom, or the Ministry of Civil Aviation on airlines, and remove entry barriers faced by domestic and foreign banks, the bulk of this problem could be solved in under a decade. The MIFC report has many deep ideas which seek to address the difficulties of competition in banking.

If this story on the front page of Indian Express were not depressing enough, here's another: the Supreme Court thinks that freedom of speech is not fundamental.

1 comment:

  1. my question might b a silly one as i dont belong to the eco field but looking to enter it....

    U questioned the PSU-banking, my doubt is wat about SBI. isn't it doing gr8 as far as management and building up the brand by continuos growth is concerned. PNB services too cannot be questioned...Even the loan procedures offered by PSU banks doesn't change while in private banks they can turn it up and down...is the story that clear as u have portrayed???

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