Banking overhaul

The longer a banking overhaul takes, the more market share will public sector banks lose to more nimble private sector competitors


Most of the current discussion on Indian banks is naturally focused on the bad loans mess.

Reserve Bank of India governor Raghuram Rajan has done well to highlight more fundamental challenges as well. The banking system is a mess at various levels. The multiplicity of regulators has led to poor outcomes. Bank boards have few powers. The government often uses the banks it owns to further its political goals. There is no reason to have central bank appointees on bank boards. The lack of talent means a missing middle in organizational charts. Bank officials are often generalists rather than specialists. All this creates a problem of perverse incentives.

An organizational overhaul is overdue. So is a regulatory one. But these will take time. The longer they take, the more market share will public sector banks lose to more nimble private sector competitors. People in the financial markets are already describing the process as privatization by stealth. Will it be the airlines story all over again?