“Privatization might be a big leap in improving banking structure of India” says Raghuram Rajan

The former RBI governor and known economist recently wrote a book “What the economy needs now”  which deals with the issues like labor reforms, healthcare, education and the environment but the economist laid more stress on the stressful condition of India’s banking sector. He is of the opinion that Privatization of banks might be a favorable step but not the final nail in the coffin.

The increase in Non-performing assets over the last few years has definitely put forward the question on the government to think about banking reforms. NPAs have not only increased in the public banks but in private banks also. It is the time for “Less government and more governance.”

The main areas those need focus are:

  1. Management and governance at Public sector banks.
  2. Decreasing Government mandates in the banks.
  3. Decreasing risks by transferring them to NBFCs or the market.

Problems with government and governance

Public sector banks work under government constraints like paying low-skilled labor with salaries higher than that from private banks counterparts and paying highly skilled low salaries as compared to private sector banks counterparts. Also, investing in government bonds create a burden on these banks. If these are freed or are at distant from government, they are definitely bound to perform better. Public sector banks should start up-skilling their workforce and start paying highly skilled up to the industry standards.

Privatization or not?

As far as privatization is concerned, small or medium sized public sector banks can be privatized as a test case and then after observing results, it should be implemented for bigger banks. It will give the evidence to further the discussion of the ongoing debate of “Privatization of banks”. Another alternative could be merging poorly managed banks with good performing banks. But the success depends on how well the two different management cultures merge and how well the employees of poorly managed banks adjust to the new management structure.

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