Banks: Regulation, not state ownership–Economic Times–04.10.2017

Markets regulator Sebi has postponed its rule that requires companies to report all payment defaults to stock exchanges, worried that it could expose the banks’ lack of health. That is sad. The way to economic health is through swift and transparent dissemination of information on corporate delinquency and enhanced capitalisation and regulation of banks to help them weather missed payments. The performance of public sector banks (PSBs) remains fragile compared to their peers in the private sector.

So, instead of hiding news of blows to financial health, the focus must be on raising their ability to absorb the punches. If necessary, by privatising them. The government has vowed to recapitalise loss-making state-owned banks and also merge some of the weaker banks with sound ones. However, mergers will not fix the systemic problems that plague PSBs. Lowering the government’s equity stake will enable PSBs to overcome the restrictions imposed by state ownership, such as low pay, short tenures, political and bureaucratic meddling and the fear of falling foul of audit and investigation agencies that do not understand banking.

Their performance remains weak — gross bad loans of PSBs are expected to jump to 14.2% in March 2018 from 10.1% in September 2017 — compared to their peers in the private sector. That must change. The need is for deeper reforms for the government to dilute its stake and let banks raise capital from the market. Taxpayers will then be spared of the bailout bill. There must also be intense competition among more new banks of different sizes — that includes payment and small banks — to achieve financial inclusion.

Non-state ownership should be accompanied by an overhaul of the incentive structure of senior bankers. Compensation must rise significantly, but a large slice of their remuneration must be deferred, linked to long-term performance and subject to clawback. This incentive to perform must be complemented by autonomy to function efficiently. Rigorous regulation will serve the public purpose. State ownership does not.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
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via Banks: Regulation, not state ownership

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