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GOVERNMENT BANKS HAVE struck a tradition of funding the whims of politicians and the Finance Minister is in no hurry to change that with general elections a few months away. A few crumbs for the private sector banks have been placed on the window sill for international investors to fly in. It is a sound political risk as private banks form just about 18 per cent of the banking system. Limits on foreign direct investment in private banks have been raised from 49 per cent to "at least 74 per cent" and a promise made to free voting rights by amending the Banking Regulation Act, 1949. But nothing has been said on FII stakes though some believe SEBI will allow a 49 per cent limit. Between the Finance Ministry, the RBI and SEBI, none is clear about the rules and a smart foreign investor could just about get away. The RBI is against big Indian corporates setting up banks or muscling a majority in an existing entity. Yet, a foreign investor can hold 74 per cent equity in an Indian bank such as ING-Vysya. An arm of Citi or GE Capital can easily pick up a private bank through the automatic route to leave regulators a few yards behind.

Sometime before the Budget, bankers expected New Delhi to mark up limits on FDI and FII investments in public sector banks (including SBI and its associates) from 20 per cent to 49 per cent. A few bankers on Mint Street still aver the Finance Ministry having taken an "in principle" decision to provide more speculative space to foreign investors. If it does happen, FII and FDI investors will be able to buy bank equity from the market sans any advantage to the bank as the majority government stake will not fall. That can happen only when FII and FDI subscribe to fresh capital raised by banks to scale down the government stake below 50 per cent. For the last three years a Standing Committee of Parliament has been sitting on a proposal to trim government stake to 33 per cent. And it suits Mr Jaswant Singh to wait for the report. With the Centre refusing to subscribe to fresh bank equity, banks will have to hit the market in two years time to raise some Rs 10,000 crore for asset creation. Public stake in most banks today is minimal with the stakeholders shooed away from any participation. Kotak Mahindra Bank can in a jiffy appoint executives to run its banking arm; similar jobs in nationalised banks are a subject of crass political bargaining.

Some how the debate is locked in by a belief of government ownership being always benign. In the last 10 years about Rs 30,000 crore of tax funds had to be put in government banks to avoid closures, despite bank boards bearing the name plates of nominees from the RBI and the Finance Ministry. In the same period, private banks have also gone under with the RBI invariably acting too late. Possibly, it is not the texture of ownership that is the issue.

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