Wednesday, February 23, 2005

Banking Reforms in India

The Indian government has recently released fresh norms for PSU banks giving them more autonomy in mergers and acquisitions. This is a welcome step. Few years from now, it would be ideal to have some four big PSU banks formed by merging more than a dozen banks which we have now. Ofcourse its assumed that the 'old private banks' in India will vanish by that time. They certainly cannot withstand the competition from foreign banks (once FDI in banking is raised to 74%) and the increasingly aggressive new private banks like ICICI and HDFC.

Thinking ahead, Govt should merge organizations like LIC, GIC, Public Provident fund and Pension funds to the four strong PSU banks which I mentoined earlier. Insurance sector already has many private players. Incidentally most of the private insurance firms are JV's of existing banks. Provident fund and Pension schemes are on the verge of being thrown open to private players. Hence it would make sense to hand over these Government organizations to PSU banks.

There are two issues to debate here. First the profitability of the "four large PSU banks" once they take over these organizations. I guess at some point we will have to do away with ridiculus schemes like 9.5 pc interest on EPF. Again SBI already has a scheme which pays as much as 9 pc interest to senior citizens. So some thought needs to be given on how PSU banks should handle presently govt organized instituitions like EPF and Pension. But on the whole banks will eventually have to put profitability ahead of social security.

The second issue is whether private players should indeed be allowed into sectors like Pension or EPF. This is akin to the debate on social security in the US. This is unavoidable to say the least. Certainly a country like India with more than billion people cannot afford schemes which pay 9.5 pc on any scheme. Afterall this only amounts looting of public money by a relatively small portion of the public. What if they are elderly or government employees. Private players will eventually force these rates to more reasonable numbers. Real social security can be achieved only by strengthening instutions like schools, public health and concentrating on employment genartion. Not by throwing away public money to a select few.

And finally what do you think about the stupidy of Post offices in India running 'loot schemes' in the name of Monthly Income Scheme and the rest. Why should not the Postal department in India be auctioned and sold to say DHL or UPS!! Certainly for the Dept of Posts in India, profitability and Competitiveness in their core business seems to be the least priority!!

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