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FOREIGN ENTITIES CAN hold majority stake in old and new private banks, going by the statement in the Rajya Sabha of the Minister of State for Finance, Mr Balasaheb Vikhe Patil. The Elders were recently informed by Mr Patil that FII stake in the private banks would be outside the FDI limit of 49 per cent. It follows that foreign stake in private banks can go up to 98 per cent — 49 per cent each through the FDI and FII routes. But would this reading sort out the tangle or even be accepted by the various regulators and the Finance Ministry? The Finance Minister, Mr Yashwant Sinha, in the Budget speech proposed "that now FII portfolio investments will not be subject to the sectoral limits for foreign direct investment except in specified sectors. Guidelines in this regard will be issued separately." Does banking — to be specific, old and new private banks — fall in the specified sector to be notified or does it come in the general category? Privately, the RBI prefers to be the guardian of the FDI limit, leaving the job of fixing the FII cap to SEBI. In short, there is distressing confusion on the issue after about a month of the Budget, and does none any good.

Despite the assurances made in Parliament, the Vajpayee Government has seemed hesitant to codify the rules for allowing majority foreign stake in private sector banking entities. The nervousness could well be because such a facility cannot be restricted to private banks but would have to be extended to public sector banks over a period. Political fire and fury could get ignited if majority foreign stake is allowed in government banks, and the Vajpayee Government is surely in no mood for any controversy now. Yet, how long can it defer taking a decision when foreign banks seem to be parleying for promoters' stake in some of the new private banks? Again, is there much logic in the RBI insisting that promoters of new private banks bring down their stake to 40 per cent through public issues? Perhaps, the RBI need not have got into the business of prescribing sectoral equity stakes but stick to its job of supervision and regulation as it is irrelevant who runs the banks as long as they are run well. Public sector banks and financial institutions and the RBI have liitle to show for the Rs 25,000 crore of the tax-money that went as recap funds. Despite the fearsome presence of the RBI, banks of all hues did play a part in the Harshad Mehta and Ketan Parekh scams.

It does not suit New Delhi to have strong and independent regulators in the RBI, SEBI or IRDA as that might dilute its writ. Is it not a fact that just about two new private sector banks, ICICI Bank and HDFC Bank, are faring well among the few okayed by the RBI a few years ago? The apex bank has not been proactive in closing the fault lines in the boards of others such as Centurion Bank and Global Trust Bank. Foreign entry into private sector banks will make them sharper players and provide tougher competition to state-run banks which still continue with their shoddy service. There is everything to be said for a change, as the banking system has not delivered at all or at best very little, since 1969.

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