Former Reserve Bank of India (RBI) Deputy Governor Viral V Acharya on Friday said there is scope for reprivatization of healthy state-owned banks. However, it is important to also remain watchful that it happens in a ‘graceful manner’ and at the right price.
“Perhaps reprivatisation of some of the healthiest public sector banks should also be on the table," Archarya said at the launch of his book titled ‘Quest for Restoring Financial Stability in India’. Acharya quit the RBI in July 2019.
A reprivatization exercise can reduce the capital the government needs to infuse in banks, which can help in maintaining fiscal discipline. According to Acharya, it will also help lenders adopt modern technology, risk management system and attract human capital with the right incentive and compensation structures.
Citing an example of the South Asian crisis, Archarya said, a large number of the public sector banks in the region had to privatized, post the crisis and they were sold at fire sale prices in many cases to private equity investors from abroad because they had money. “I am visualizing that we should not end up in this scenario. In my view, it would be better to actually divest these stakes in a graceful manner at right prices and the right prices will be attractive from a variety of constraints only for the relatively healthier, public sector banks in my view," he said.
“If we reduce the stake of the government in the banking sector besides the backdoor privatization that was mentioned, I think we will actually lift the quality of regulation for the system as a whole," he said.
As far as governance in private banks is concerned, Acharya said that while there have been failures, in case of public sector banking as such as been inefficient, with low return in assets and taxpayers money.
“There have been failures of governance in the private sector banks. But I think one should separate what is a systemic problem in a part of the banking sector, notably in the public sector banking, which has been inefficient, with very low return on assets, very low return on taxpayer money for a long period of time, with what are idiosyncratic issues in a few banks in the private sector banking," Archarya said.
Acharya’s statement comes few weeks after finance minister Nirmala Sitharaman announced a new public sector enterprise (PSE) policy, under which there will at least one PSE in strategic sectors while PSEs will be privatized in non-strategic sectors. While the government has not announced the sectors, this opens up possibility of further consolidation among the 12 public sector banks.
PTI contributed to the story