Reducing state stake in banks welcome

Reducing state stake in banks welcome

The Reserve Bank of India’s (RBI) reported suggestion to the government to lower the government’s equity stake in the banks it owns to 26% makes eminent sense. It would enable PSBs to raise lots of fresh capital and increase their systemic resilience. Divestment will fetch revenues for the government, and lower the Centre’s requirement to recapitalise PSBs. Ideally, shares should be sold to the retail public in search of a good investment opportunity and not to large investors, whose funds should finance greenfield investment rather than asset transfers at this juncture. Privatisation would help these banks overcome restraints placed by State ownership such as low pay, short tenures, political interference and the fear of being pursued by investigation agencies.

The Yes Bank saga shows that private ownership is no guarantee of good governance. What is important is robust oversight and accountability, irrespective of the nature of ownership. Regulatory oversight should see banks not just separately, but in relation with one another and non-banking financial companies (NBFCs). RBI’s latest Financial Stability Report estimates gross bad loans of PSBs would jump to 15.2% by March 2021 from 11.3% in March 2020. Stress tests show that five banks may fail to meet minimum capital requirement level by March 2021 in a very severe stress scenario. Clearly, deeper reforms are needed than recapitalising banks. Freeing banks from government control would allow many desirable reforms to take place.

Bank boards must be fully professionalised, empowered with taking all bank-related decisions and held accountable for their performance. The incentive structure of senior bankers should be overhauled to reward performance, with a large slice of their remuneration linked to long-term performance of the bank and subject to clawback. Effective supervision and regulation hold the key. Another vital reform is to create a thriving debt market to let long-gestation infrastructure projects be funded through bonds and prevent the future build-up of bad loans. Banking needs reform.