Privatise PSU banks: Viral Acharya

RBI deputy governor Viral Acharya has called for privatization of nationalized banks and sale of their subsidiaries and other assets. Acharya also quoted an IMF report to highlight that Indian businesses are the most heavily indebted and banks worse off than their peers in terms of capital available to meet bad debts.

The deputy governor also reiterated governor Urjit Patel's call for merger of under-performers with stronger banks as a quid pro quo for government capital injection. “It would provide great opportunity to rejig management responsibility away from those who have underperformed or dragged their feet the most,“ said Acharya in his speech at a FICCI event.

According to the deputy governor, the presence of a large safety net of state-ownership and deposit insurance, which ensure that there are likely to be no bank runs, end up eroding any discipling force that gets the bank health restored.

“Perhaps re-privatizing some of the nationalised banks is an idea whose time has come?“ said Acharya. He added that this would reduce the overall amount that the government needs to inject as capital and help preserve its hard-earned fiscal discipline.

Terming bank recapitalization as throwing good money after bad, Acharya provided the example of bank recapitalization plan of 2008-09 after the global financial crisis. “Banks that experienced the worst outcomes received the most capital in a relative sense. Most of these banks need capital again,“ he said. In his speech, the deputy governor likened the bad loan situation to a person slipping off the terrace of a skyscraper. He said that not preparing for an emergency is akin to “hoping that laws of gravity will freeze and work differently this time“.

Building up a case for taking away management from weak banks, Acharya said they throw good money after bad to help borrowers repay past loans and delay making provisions for default. They also try to earn money fast by providing risk loans that give higher return. “Faced with such borrowing prospects healthy borrowers who have access to alternate forms of finance may be able to switch out of bank borrowing,“ he said.

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