Govt should restrict exercising ownership rights in banks: RB

The Reserve bank  expressed concern over the government “occasionally exercising” its ownership rights in banks and financial institutions through channels outside of their boards, and asked it to show exemplary corporate governance.

“There are questions about how the government will play out its ownership role. This is not restricted to Nabard, it is something which is being played out in a number of institutions including the commercial banks,” Subbarao said .

In 21 banks, including SBI, the government owns majority stake. Besides, it has majority ownership in many FIs including 4 general insurance firms and one life insurer, LIC. “Occasionally”, Subbarao said, “there are concerns over the government exercising its ownership rights not through the established channel which is the board mechanism, but outside of board.

“I don’t think that it is a good example of good corporate governance. One thing for the government could be to show exemplary behaviour of corporate governance and exercise their ownership rights through the board. I think that would be good for all financial institutions, including Nabard.”

There have been occasions when the government is believed to have prevailed upon the state-owned financial institutions as owner and informally directed them to take certain financial decisions.
There were reports that in the recent stake sale of ONGC, the government had asked state-owned LIC to pick up the bulk of stake.

However both the government and LIC had denied the allegation. Life Insurance Corporation (LIC) had pumped in over Rs 12,000 crore and purchased 95 percent of the equity in ONGC to bail out the government’s disinvestment in the oil PSU in March.

On farm loans, Subbarao said, “We need to do many things to improve the performance of our agriculture sector; improving the flow of agricultural credit is one of the important ones.” This requires effort from all the 3 institutional segments – commercial banks, Regional Rural Banks (RRBs) and cooperatives, he said.

Commercial banks need to find innovative ways of reaching out to farmer, RRBs need to leverage on their comparative advantage and cooperatives have to improve their governance structures, Subbarao said.
As the premiere public institution in agricultural credit, Nabard’s role is crucial in this regard, he added.

(curtsey : first post)

Rupesh Yatesh Dalal
Head Research Department

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