File photo of former central bankers Raghuram Rajan and Viral Acharya. | Photo: Tomohiro Ohsumi/Jin Lee/Bloomberg
File photo of former central bankers Raghuram Rajan and Viral Acharya. | Photo: Tomohiro Ohsumi/Jin Lee/Bloomberg
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New Delhi: The Narendra Modi government’s reform of public sector banks in the last six years is a “still-born effort”, said a new research paper jointly authored by former Reserve Bank of India (RBI) deputy governor Viral Acharya and former RBI governor Raghuram Rajan.

The duo suggested a slew of reforms, including greater operational independence for state-run banks, gradual reduction in government’s stake below 50 per cent and reprivatisation of some select banks to begin with, in the paper released 21 September and available on the website of University of Chicago Booth School of Business.

The paper warned that the pandemic will sharply increase the loan losses in the system and it may be greater than what the government can afford to pay.

“With government deficits and debt levels reaching enormous levels, there simply are not enough budgetary resources to recapitalize banks. An encumbered, under-capitalized public sector banking system will not lend well, which will be a huge tax on growth, as it has been for the last six years,” the paper said.

“More worrisome, without reform the banks will accumulate further losses. Status quo is simply not an option,” it added.

The authors also stressed that for banking to become an engine of growth, incremental reforms are not enough.

“With the enormous strains on government finances from the slow growth pre-COVID and the subsequent effects of the pandemic, the country has to transform the banking sector from being a drain on government resources and an impediment to growth to becoming an engine of growth. This will not happen through incremental reforms. The status quo is fiscally untenable,” the paper said.

Acharya was RBI deputy governor between 2017 and 2019. He quit ahead of the completion of his term in July last year. Rajan led the central bank between 2013 and 2016.


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‘Little incentive to loosen grip’

The paper pointed out that despite Prime Minister Narendra Modi’s backing for reforms in state-run banks, including appointing the Banks Board Bureau to decide key appointments, there has been hardly any progress in the last few years.

“The final decision as well as allocation of selected CEOs to banks is still with the government. The Department of Financial Services still appoints bank board members and decides on important strategies such as mergers,” the paper noted.

It added that it is unfair to only blame the bureaucracy as the government in power has “little incentive to loosen its grip on public sector banks”.

The former central bankers pointed out that the government obtains enormous power from directing bank lending, including the power to exercise control over industrialists.

Citing the example of electoral bonds, the paper pointed out that the government gets access to sensitive information through its state ownership as with the identity of purchasers of electoral bonds, which is known only to the State Bank of India.


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More independence to banks, abolishing financial services dept

Acharya and Rajan’s paper suggested several measures to improve the performance of state-run banks but noted that many of them have been made by committees like the Narasimham and the P.J. Nayak panels.

It called for improving the operational performance of state-run banks through a holding company structure for government banks. It added that the government should pay the state-run banks for costs incurred to meet its goals like opening branches in remote rural areas.

The paper also suggested doing away with the Department of Financial Services (DFS). DFS is one of the five departments in the Ministry of Finance overseeing state-run banks.

It also advocated incentives for senior management and longer terms for bank chiefs.

State-linked banks and not state-owned

The paper recommended gradually reducing the government’s stake in public sector banks, first beginning with reducing the stake below 50 per cent.

It added that reprivatisation of select PSBs can be looked into along with automatic dilution of government stakes.

“Our proposals, taken together, will move the needle significantly on Indian banking. They are not, however, revolutionary… There are strong interests against change, which is why many would-be reformers are cynical… We are more optimistic that a middle road is achievable, given that the greatest stumbling block has been the government, the bureaucracy, and the interests within it.”


Also read: With double-digit GDP decline forecasts, India’s recovery prospects go from bad to worse


 

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16 Comments Share Your Views

16 COMMENTS

    • Mr Yogendra: Messrs. Rajan and Acharya should have blamed Nehru too shouldn’t they ?

      In other words, for every Modi made calamity and self-goal, the blame must be allocated to UPA 2, Congress, Nehru, Muslims, poor implementation, uncooperative states and so on.

      Tell me Mr Yogendra: Just why the hell should the present government not be held to account for its gross mismanagement of the economy ? Is it blasphemous to criticise the pogromwala ?

      What blinkered, blind bhakths like you who inhale and get high on Arnab Goswami’s hot air cannot accept is the fact that the economy bequeathed by Dr Manmohan Singh to the pogromwala was in relatively good shape. And despite the global financial crisis of 2008, the steady hands of Dr Singh – a trained economist to boot – ensured that India weathered that crisis admirably.

      More importantly, your ilk has to grasp the fact that matters of economic policy are extremely complex and are best left to trained economists, The demonetisation débâcle proved that convincingly. PM Modi ignored the advice of the RBI and its qualified economists and preferred to listen to quacks like Baba Ramdev and Anil Bokil and demonetisation ensued. India’s informal sector is yet to recover from that self-goal and perhaps will take a generation to do so. The nation lost the rare chance to corner the market that the faltering Chinese manufacturing had lost. And none of the touted gains of demonetisation materialised, proving once again that chaiwala economics cannot be used to run a country.

      Not that such rational arguments will convince bhakths like you who are members of the Modi cult…

    • Mr Yogendra: Messrs. Rajan and Acharya should have blamed Nehru too shouldn’t they ?
      In other words, for every Modi made calamity and self-goal, the blame must be allocated to UPA 2, Congress, Nehru, Muslims, poor implementation, uncooperative states and so on.

      Tell me Mr Yogendra: Just why the hell should the present government not be held to account for its gross mismanagement of the economy ? Is it blasphemous to criticise the pogromwala ?

      What blinkered, blind bhakths like you who inhale and get high on Arnab Goswami’s hot cannot accept is the fact that the economy bequeathed by Dr Manmohan Singh to the pogromwala was in relatively good shape. And despite the global financial crisis of 2008, the steady hands of Dr Singh – a trained economist to boot – ensured that India weathered that crisis admirably.

      More importantly, your ilk has to grasp the fact that matters of economic policy are extremely complex and are best left to trained economists, The demonetisation débâcle proved that convincingly. PM Modi ignored the advice of the RBI and its qualified economists and preferred to listen to quacks like Baba Ramdev and Anil Bokil and demonetisation ensued. India’s informal sector is yet to recover from that self-goal and perhaps will take a generation to do so. The nation lost the rare chance to corner the market that the faltering Chinese manufacturing had lost. And none of the touted gains of demonetisation materialised, proving once again that chaiwala economics cannot be used to run a country.

      Not that such rational arguments will convince bhakths like you who are members of the Modi cult…

  1. All this is made to remove the importance of government in the long run and make the political parties depend on private corporations for funds…which in effect transfers all the power to private corporations….which would make justice inaccessible to the common man….god save the nation’s democracy…

    • I fully agree with your outstanding comment Mr Rajesh.

      But the paradox in India and even in many mature democracies like the USA is the fact that the common man votes for these demagogues.

      For instance, many of Trump’s voters are white, blue collar workers who actually stand to lose heavily and quickly by voting for Trump. But Trump appeals to their identity as white Americans and garners their votes. I once saw a BBC interview with a miner and his wife who were dependent on drugs to the tune of $ 6000 per month. They received the medication free of charge thanks to Obamacare. But yet, they voted for Donald Trump, the very man who promised to ditch Obamacare ! When the reporter gently reminded this couple that they were signing their own death warrants, they nonetheless said that they did not regret voting for Trump as he was a patriot !

      Democracy requires a public that holds its leaders accountable and not puts them on a pedestal to be worshipped as people seem to be doing in India. But alas, that is often not the case.

      As the Greek philosopher Plato said:

      “Democracy is the triumph of opinion over knowledge”

      That applies to India under Modi.

  2. They wants that the public sector banks should run as commercial banks earning profit independently without discharging social obligations inseminating the government policy. If so ,banks will be none other than pown brokers.Industries in India iis still has to acquire modernization to compete with world trade because present regulations are not friendly.They are incurring loss and not able to pay back banks barring few exceptions. Bereuocracy and corruption are impediment for development in the country.Though the government has involved in the functioning of bank to implement certain un fabulous scheme which ultimately went on failure for recurring loss to the banks, it cannot assume its independence without discharging social obligations to the poor.Government should have recapitalise banks to compensate the loss on implementation of social obligations then and there,but it did not as the government changes on every five years in the States and Centre.This was the reasons for the poor performance of public sector banks.Above all theoretical people with so many degrees should not head the bank , but by the practical people well experienced in the field of banking.

  3. There is enough money with the banking sector. What about the lavish interiors in the bank branches. The heavy salaries paid to their staff. From where does all these money come from. There are so many co operative banks which were closed down, where lakhs of clients have lost their crores of rupees. Many senior citizens are running from pilar to post for their hard earned money. What has the goverment done for them. The present government is a total failure in all it’s policies implemented till now. The demonetization, the GST and now the way covid situation is handled, has reversed the economy decades back.

  4. Out of all the ex-RBI governors, Raghuram Rajan only knows everything right about Indian economy. I dont know what problems he solved when he was on the job.

  5. Looks like another attempt by the academically acclaimed but otherwise politically notorious economists duo to fish in troubled waters! There is nothing new in what is being suggested nor there is any dearth of knowledge on this issue. But it seems they need to remain in the news in India; probably it miht help during the next call from Rahul !

    Banking reforms need strong political will on the part of Modi and somehow he is not able to bring it on the table. There is nothing beyond this on this topic. Certainly there is no economics, worthy of Ivy League professors!!

    • Mr Surendra Barsode: Mind boggling that an academic research paper from renowned economists is something you prefer to pooh-pooh. Is it because the pracharak, the BJP IT Cell, Whatsapp University and Arnab Goswami told you something else right ? Or were you told that Nehru at fault?

      And when one of the pracharak’s own financiers viz. Anil Ambani is a wilful defaulter to banks and capsizes banks like YES Bank through his own NPAs, your talk of banking reforms from Modi is a sick joke.

      Pathetic Mr Barsode.

  6. The govt must sell off the banks. With covid, the revenues have been hit badly and therefore recapitalisation doesn’t seem possible. Moreover a demand based stimulus is needed by pooling in every penny the govt can get. The govt should keep SBI and put the rest for sale lock, stock and barrel.

    • There is nothing to scrape off from the bottom of the barrel Mr Harsha. And besides, who wants to buy the poisoned pills of Indian public sector assets? When the biggest defaulters of the banks such as Anil Ambani have the backing of Modi and the BJP, you wouldn’t be able to get back your loans from him would you ?

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