New Delhi, September 21
Former RBI Governor Raghuram Rajan suggested on Monday that the government privatize select public sector banks, establish a bad bank to deal with NPAs and dilute the role of the Department of Financial Services.
The reforms are necessary to ensure bank government growth without periodic boom-bust cycles, said a document titled “Indian Banks: Time to Reform?” co-authored, Rajan and former Deputy Governor of the Acharya Viral Reserve Bank.
“The reprivatization of selected utility companies can then be undertaken as part of a carefully calibrated strategy, attracting private investors with both financial and technological know-how; corporate houses should be prevented from acquiring significant stakes, given their natural conflicts of interest, ”the newspaper said.
Noting that the government gets enormous power by directing bank loans, he said that sometimes this power is exercised to promote public goals such as financial inclusion or infrastructure financing, sometimes it is used to offer patronage to industrialists or exercise control. about them.
“The liquidation of the Department of Financial Services in the Ministry of Finance is essential, both as an affirmative signal of the intention to grant independence to the boards of directors of banks and the administration, and as a commitment not to get involved in a ‘slow mission “when compulsions arise to use banks to provide costly services for social or political objectives,” the document said.
According to the document, private asset management and domestic asset management “bad banks” should be encouraged in parallel with the online platform for the sale of distressed loans.
“The ‘bad bank’ of the national public sector could serve as a vehicle to add loans, create management teams for distressed companies and possibly buy and hold distressed assets in a sector such as energy until demand returns.”
“It could provide support prices for loans sold by PSBs,” the document suggested.
He also argued that state-linked banks can be a first step in altering the ownership structure of some public sector banks (PSBs), where the government reduces their holdings to less than 50 percent, creating distance from banks’ operations. and improving governance. by the way.
“In addition to regulatory and market reforms, we propose reforms to bank ownership and governance, especially for public sector banks. With the current enormous strains on government finances, there may be a window of opportunity in which these reforms may be possible, as the status quo is unsustainable, ”the newspaper said.
On the handling of bad loans, the document said that out-of-court restructuring frameworks can be designed for time-bound negotiations between the creditors of a distressed company, in the event that the National Company Law Court (NCLT) filing does not apply. ).
The two need to work together as the procedural threat from the Insolvency and Bankruptcy Court (IBC) serves as a back-up, facilitating meaningful negotiation out of court, he added.
Regarding banking licensing rules, the document proposed that banks’ immediate-use licenses be kept open at all times.
“Instant licenses for banks can be kept open at all times, with an annual invitation for applications, to create a more dynamic banking with the entry of better players, especially allowing high-performing microcredit institutions to become small financial banks, and similarly, small high-yield financial banks to become universal banks.
“By contrast, underperforming universal banks may be relegated to small finance bank status,” he suggested.
The document also stressed the need to allow PSBs to recruit laterally while retaining the talent they have.
“Management incentive structures need to be strengthened with longer senior management terms, better performance appraisal, performance-based promotions and extensions, as well as some reliance on side-hiring, which would also provide state-of-the-art banking services. ideas and practices ”, it said. PTI
