Relax takeover regime for banks: Rajan committee

April 7th, 2008 - 4:14 pm ICT by admin  

By Arvind Padmanabhan
New Delhi, April 7 (IANS) India should be liberal in allowing takeovers of banks by both domestic and foreign entities and sell state-run financial institutions that are under-performing, says a high-level committee set up by the plan panel. “India is at a turning point in its financial sector,” says the draft report of the Planning Commission committee on financial sector reforms headed by Raghuram G. Rajan, former chief economist of the International Monetary Fund (IMF).

“The proper role of the government today is to improve the financial sector’s infrastructure and regulation even while removing the plethora of constraints and distortions that have built up over the years,” the committee adds.

Besides Rajan, now a professor in the University of Chicago, the high-powered committee includes ICICI Bank chief K.V. Kamath, State Bank of India chairman O.P. Bhatt and credit rating agency Crisil’s chief R. Ravimohan.

The committee - that makes a set of 35 recommendations in its draft report, with the final suggestions expected in a couple of months - feels the government must not impose direct control over financial institutions so that they can do their jobs.

“The populism and the direct intervention, that unfortunately seems to be making a comeback, should be relegated firmly to the past,” adds the 241-page report, which has been presented to the Planning Commission.

On the issue of allowing the subsidiaries of foreign banks to take over domestic institutions, the committee feels this would substantially increase the pressure on existing players.

“This can be salutary, but domestic banks need to prepare themselves to meet the challenge.”

The committee admits the sale of large state-run banks to equally large private banks could raise issues of concentration and offloading them to industrial houses has been problematic across the world.

It, therefore, feels the pragmatic approach should be to focus on reforming the governance structure and acquiring strategic partners with eventual sale based on the experience, public mood and political environment.

In the present-day context, when prices have begun to spurt, and inflation is at a three-year high, the committee also has a piece of advice for the Reserve Bank of India (RBI) - stick to a single instrument to tame prices.

“The RBI must formally have a single objective to stay close to a low inflation number or within a range in the medium term, and move steadily to a single instrument, the short term interest rate to achieve it,” it says.

According to the panel members, inclusion, growth, and stability were the three main objectives of any reform process and the fortunate part was that these were not in contradiction.

“With the right reforms, the financial sector can be an enormous source of job creation both directly, and indirectly through the enterprise and consumption it can support with financing,” it says.

“But without reforms, the financial sector could become an increasing source of risk, as the mismatches between the capacity and needs of the real economy and the capabilities of the financial sector widen,” it warns.

The report says the government has an opportunity where the process of gaining productivity and innovativeness to serve the masses will give a unique edge to the financial sector to become competitive internationally.

“The road to making Mumbai an international financial centre runs through every village and slum in India,” says the report, commenting on the government’s aim to make India’s commercial capital a global financial hub as well.

“The country’s leaders have a choice to make, and this committee hopes they will make the right one.”

Other recommendations include:

- Liberalize interest rates with transparent disclosures

- Allow local agents to extend financial services

- Make boards of large public sector banks stronger

- De-link banks from additional government oversight

- Steadily open up corporate and government bond market

- Free banks to set up branches and ATMs anywhere

- Set up a financial sector oversight agency

- Set up an office of the financial ombudsman

- Strengthen Deposit Insurance and Credit Guarantee Corp

- Encourage strong asset reconstruction companies

- Formulate a bankruptcy code in the Indian context

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