A day after the central bank proposed dilution of the Centre’s stakes in public sector banks (PSBs) to 26 per cent, former RBI Deputy Governor Viral Acharya proposed divestment and even privatisation of healthier PSBs.
“In my opinion, the divestments are a first step … divestment beyond majority stake, because they will help relax the fiscal constraint,” he said, adding, “Perhaps privatisation of some of the healthiest public sector banks — relatively healthier public sector banks — should also be on the table.”
Acharya, who is now Professor of Finance, New York University Stern School of Business, said the Narasimham committee had actually said the government stake in PSBs should be brought down to 30 per cent and there should be synergistic mergers designed with between banks where there is complementarity. In a presentation to Prime Minister Narendra Modi, Reserve Bank of India (RBI) officials had proposed cutting government stake in PSU banks to 26 per cent and longer tenure for the chiefs of PSBs.
“So there is room for branch consolidation and reducing your overhead costs. There is dual control between the government and the RBI of the public sector banks needs to be unavailable. I think these were actually issues that were flagged, even before the most recent variable of non-performing assets have been recognized,” Acharya said after launching his book ‘Quest for Restoring Financial Stability in India’.
Referring to the Southeast Asian crisis, he said a large number of banks — public sector banks — in these Southeast Asian countries had to be privatised in the midst of an external and financial crisis in these countries in 1997-98. “These banks had to be sold at fire sale prices. In many cases, they were actually sold to private equity investors from abroad because that was the only money coming in willing to buy these banks,” Acharya said.
He said India should not end up in this scenario and it would be better to actually divest the stakes in a graceful manner at right prices. The right prices will be attractive from a variety of constraints only for the relatively healthier PSBs. “There will be benefits. In my view, they will not just be a relaxation of the fiscal constraint. I think they will bring with them modern technology, fintech capacity, modern credit scoring capacity, risk management capacity and the ability to attract human capital with sort of, you know, the right incentive compensation structures,” Acharya said.
“If we reduce the state of the government in the banking sector, besides the backdoor privatisation that was mentioned, I think we will actually lift the quality of regulation for the system as well,” he added.
‘Direct deficit financing should be last resort’
Former RBI Governor D Subbarao said direct financing of deficit by RBI should be absolutely the last resort “no matter that today’s crisis is extraordinary”. “The case for direct financing is made on the argument that government borrowing this year has ballooned way beyond normal,” he said.
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