More aggressive disinvestment and privatisation of public sector banks (PSBs) would address some of the structural issues in governance, such as incentives and efficiency of these banks, according to the International Monetary Fund.
According to the staff report prepared by the IMF, the government should come up with a comprehensive plan to improve governance, internal controls and operations of PSBs, and consider a more rapid withdrawal of public ownership.
Flagging the recent large fraud at a PSB (read Punjab National Bank), the report said this highlights the weaknesses in the financial sector, and underscores the need for the government to take further steps to improve the governance and operations of PSBs.
PSB governance reform and reducing the government’s footprint in the banking system would play an important role in levelling the playing field, thereby promoting competition and efficiency.
Referring to the government’s January 2018 Banking Reforms Roadmap, which indicates that the recapitalisation will be contingent on measures to strengthen governance and operations, the report said the plans remain vague. The IMF staff recommended that the authorities pursue more far-reaching governance reforms by removing the RBI representatives from banks’ boards and defining better the terms of reference for board members, including the Ministry of Finance representative, to strengthen the quality and independence of bank boards.
“Important steps have been taken to improve the recognition of non-performing assets (NPAs) and recapitalise public sector banks (PSBs) but more needs to be done.
“The IBC has the potential to improve significantly NPA resolution and corporate debtors’ repayment discipline,” said the report.
In addition to speeding up NPA resolution and completing PSB recapitalisation, the report urged the authorities to further strengthen governance and accelerate implementation as part of a broader package of financial reforms.
The reforms suggested include improving bank governance, reducing the role of the public sector in the financial system, and enhancing bank lending capacity and practices, thereby reducing the fiscal contingency risks arising from PSBs in the future.