The decision to sell the stake held by the Reserve Bank of India (RBI) in the country’s largest bank—the State Bank of India—to the government attempts to deal with a genuine problem. A regulator should not own an entity it regulates.
But the proposed solution is a fundamentally bad one, for two reasons. One, the main problemthat Indian banks face is a lack of capital. Current laws cap private ownership of public sector banks to 49%, thus starving them of capital. Shifting ownership from one arm of the government to the other does not solve the problem. Second, the actual way this deal will be structured is a mere accounting trick. The government will buy RBI’s stake and then recover the money through a dividend from the central bank. In other words, there will be no net cash changing hands.
But this structure will ensure that the fiscal numbers show two illusory changes—higher capital spending and lower revenue deficit.
Instead, privatize SBI.