RBI Deputy Guv Viral Acharya calls for privatising some banks

RBI deputy governor warns against sowing the seeds of another lending excess

Reserve Bank of India (RBI) Deputy Governor Viral Acharya said it could be time to reprivatise some of the nationalised banks to prevent the throwing of good money after bad banks in the form of persistent recapitalisation. 

“Perhaps reprivatising some of the nationalised banks is an idea whose time has come?” he said in a keynote address at an event organised by the women’s wing of the Federation of Indian Chambers of Commerce and Industry. In all, the deputy governor’s five-point suggestion on resolution of banks’ current problems is for allowing private capital raising, asset sales, mergers, tough corrective action, and divestment.

Even as bank consolidation remains a contentious issue, and generally the central bank doesn’t comment on it, top RBI officials have become vocal on this. Earlier this week, Urjit Patel, the central bank's governor, said the system needed fewer but healthy banks, instead of many public sector lenders.

In his speech, Acharya said, “As many have pointed out, it is not clear we need so many public sector banks. The system will be better off if they are consolidated into fewer but healthier banks.” This could indicate a gearing up to guide banks towards merger. Bank merger is also on the government’s agenda, as it struggles to recapitalise the state-owned ones.

From April 1, State Bank of India (SBI) has been operating after merging five associate banks with itself. The government wants to divest stake in other public sector banks (PSBs), too. The finance minister has said he wants to first privatise IDBI Bank.

The central government nationalised a number of private sector banks in 1969, and then again in 1980, to push a socialist agenda, including financial inclusion.

However, those hopes haven't been fully achieved. And, PSBs are saddled with a total of Rs 10-14 lakh crore in stressed assets, eating away precious capital. 

“After all, we do have cooperative banks and micro finance institutions to provide community-level banking. So, some banks can be merged, as a quid pro quo for timely government capital injection into the combined entity,” Acharya said in his speech.

This would, he added, offer the opportunity to rejig management responsibility away from those who'd under-performed or dragged their feet the most. And, he said, the revised prompt corrective action (PCA) can be used to discipline PSBs. “Undercapitalised banks could be shown some tough love and be subjected to corrective action...such action should entail no further growth in deposit base and lending for the worst-capitalised banks. No Growth!” he said, adding such action should entail no further growth in deposit base and lending for the worst-capitalised banks. "This will ensure a gradual “run-off” of such banks, and encourage deposit migration away from the weakest public sector banks to healthier public sector banks and private sector banks," Acharya added.

The deputy governor reiterated his stance on banks issuing deep discount bonds to capitalise themselves but stayed away from suggesting government-aided asset reconstruction companies, that would also be funded by private sector, as he did in his first speech on the issue, on February 21. 

Instead, this time, he suggested plain old asset sales by banks, as well as selling of non-core assets to raise capital, instead of only depending on the government.

However, he was also clear that the government should recapitalise its banks more. “Clearly, more recapitalisation with government funds is essential. However, as a majority shareholder of PSBs, the government runs the risk of ending up paying for it all,” he said. Adding that the recapitalisation pattern of 2008-09 showed banks that experienced the worst outcome received the most capital. And, were now back again with their need for capital. 

"We must not allocate capital so poorly, recreate “Heads I Win, Tails the Taxpayer Loses” incentives, and sow the seeds of another lending excess," he added.

Acharya said the International Monetary Fund’s assessment that the Indian industrial sector was one of the most heavily indebted in the world and that the Indian banking sector was one of the worst in emerging markets, was “accurate”.  

And, therefore, the time had come for the ailing PSBs to be dealt with in “creative ways, instead of just propping them up with state aid”.