Indian banks have been sitting on the bad loans volcano for a long time. But it did not quite become a subject of drawing room discourse until diamond czar Nirav Modi was found involved in a massive banking fraud. And once it did, it re-opened the debate whether it was time for the privatisation of Public Sector Banks (PSBs).
Veteran banker Narayanan Vaghul, also dubbed as the pioneer of private banking in India, has joined the force in favour of privatising the banks once again.
“A day after (bank) nationalisation (back in the year 1961), I attended a meeting in the SBI boardroom as the secretary of coordination committee. RBI governor L K Jha said that nationalisation won’t make any difference,” Padma Bhushan-awardee Narayanan Vaghul recalled during an interview with CNBC-TV18.
He said that India’s banking mess, to a large extent, is because of the PSBs under which there was no improvement for last 50 years. “For 50 long years we have been lending and the problem is duality of control,” he told the channel. Narayanan Vaghul — the founder of (then) ICICI Ltd — said that the RBI was right in saying that it did not have much control over PSBs.
On Wednesday, a month after the PNB fraud, RBI governor Urjit Patel contended that RBI’s regulatory powers over PSBs are weaker than those over the private sector banks and asked the government to “inform itself” about what it wants to do with the banking crisis.
The difference between the 8th and 24th RBI governor is that while L K Jha said it candidly, Urjit Patel a bit subtly: Government’s ownership will not and is not helping.
In India, 21 PSBs constitute nearly 70% of the banking system. Of these 11 are under RBI’s watch for high bad loans and 5 more is on the verge of joining the list. On July 19, 1969, the Indira Gandhi government nationalised 14 banks through an Ordinance, which later became the Banking Companies (Acquisition and Transfer of Undertaking) Act aka Bank Nationalisation Act.
Narayanan Vaghul said that the banking system has two issues: control and ownership, adding that while the government can continue to have ownership in the banking system, it must give up its control for it to improve. “It can happen in stages; and the final stage should be government exiting the banking system,” he said.
Former RBI governor C Rangarajan, too, advised the government last September to privatise majority of PSBs, retaining just a few under control. However, the Narendra Modi government indicated that privatisation of banks is on its mind.
At an event last month Arun Jaitley said that it was matter of large political consensus and the opinion in the parliament may not be favorable. “The issue of bank privatisation involves a large political consensus and involves an amendment to the law (Bank Nationalisation Act). My impression is that in Indian political opinion in the Parliament may not favor this idea,” Arun Jaitely had said.