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What IOC can learn from SBI
A K Bhattacharya
 
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May 21, 2008

The top management of State Bank of India [Get Quote] must be surprised with itself. In an act of bravery, unprecedented in the history of India's state-controlled companies, SBI has placed a temporary ban on fresh credit for purchase of a variety of farm equipment including tractors and combine harvestors.

The apparent reason for this bold step is SBI's concern over rising defaults on loans for such farm equipment. The additional trigger for this may have also been the SBI top management's assessment that defaults on farm equipment loans will only rise in the wake of the central government's announcement of the Rs 60,000 crore (Rs 600 billion) farm loan waiver scheme.

That this decision is a rare act of bravery will become evident from the following points. One, SBI is the largest player in the tractor and farm equipment financing business. So, if it puts on hold all loans for purchase of tractors and combine harvestors, there will be an all-round hue and cry.

Politically, it will be seen as an anti-farmer move and is bound to cause a major controversy. 

Two, SBI's decision will, in all probability, mean that its target for total loans to the agriculture sector and, thereby, its obligations under the priority sector lending scheme, will be adversely affected. In spite of this, the country's largest bank has decided to stop fresh loans for purchase of farm equipment.

This only shows that its fears of rising loan repayment defaults are so serious that they prompted such a stoppage of fresh credit to this sector.

Three, the SBI top management has made no secret of the fact that the farm debt waiver package, announced with fanfare along with the 2008-09 Budget, has already begun affecting the discipline of timely repayment of loans by borrowers.

What has given this extraordinary courage to the SBI management is difficult to fathom. Mind you, it is the same management that a few months ago had quietly agreed to bring down the interest rates, just because the finance minister had desired a moderation in the rates.

It is most likely that the SBI management will soon be persuaded to reconsider its decision and resume fresh loans to the farm equipment sector. Opposition political parties have already begun projecting this as an instance of the government's unfriendly attitude towards farmers! India's politicians will not change, irrespective of whether they are part of the government or are in the Opposition.

But how one wishes that SBI's sudden outburst of courage turns infectious and the oil PSUs also start behaving the same way, so that they could take care of their legitimate commercial interests instead of sacrificing their finances at the altar of political compulsions!

International crude oil prices have almost doubled in the last one year and yet the state-owned oil marketing companies have not been allowed to share this burden, even partially, with the consumers in the form of a hike in the prices of petrol, diesel and liquefied petroleum gas, all of which continue to remain under price control.

Barring a marginal price hike last February, there has been no relief for these oil PSUs. Their losses have been mounting, the amount of oil bonds they were promised to partially compensate them for their losses has been further scaled down and their ability to undertake fresh capital expenditure has been severely undermined.

Yet, none of these oil marketing companies has so far had the courage to confront the government with the hard options the latter has.

The government should either pay in cash (not in bonds that can be traded only at a discount!) to compensate them for their losses or the oil companies will stop importing crude oil, which will result in a shortage of petroleum products in the domestic market.

Thus, the oil companies continue to bleed and the government manages to save the economy from a higher dose of inflation.

What about the ordinary shareholders of these oil marketing companies? Remember that they are listed on the stock exchanges, just as SBI is. Can the majority shareholder in these companies take decisions that blatantly harm their financial interests and even their long-term viability? There is a conflict of interest here.

The government is entitled to take steps to rein in inflation or to provide loans to farmers to help them purchase farm equipment in spite of fears of rising defaults.

But should it try to achieve such goals by using its clout as a majority shareholder in the oil PSUs or SBI?

It is perhaps time that ordinary shareholders of these companies got more active and took necessary steps to protect their rights as minority shareholders.

They may even consider approaching the market regulator, the ministry of corporate affairs or even the courts to seek redress of their grievances. At least till such time, oil PSUs should start doing what SBI has done.


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