Clipped from: https://economictimes.indiatimes.com
The government is toying with the idea of privatising some public sector banks (PSBs). This is welcome in principle. The government’s stated policy on strategic sectors of the economy is to limit the number of State-owned enterprises to four. If banking is classified as a strategic sector, and it is difficult to classify it otherwise, the government has to either merge PSBs further to reduce their number to four or privatise some of the smaller ones. In either case, a necessary pre-requisite is to create a governance and supervision framework that would render the nature of ownership, whether public or private, immaterial to the functioning of the bank. That would include shoring up the banks’ capital buffers, including some tiers of capital meant primarily to absorb risk, providers of which would need higher than normal returns to induce them to make that capital available.
Non-performing assets (NPAs) are the bane of India’s banks at the moment. The public sector banks have double-digit ratios of gross NPAs to total assets. The ratio is significantly lower for private banks and even lower for the foreign ones, which are also privately owned, for the most part. In the league table of the world’s banks, the biggest ones, leaving aside the Chinese banks that mostly do business with Chinese companies, are privately owned. Of course, the government has had to come to their rescue during the Global Financial Crisis, and very few, such as Citibank, managed to stave off taking a State-sponsored bailout. Since then, global covenants on strengthening systemically important banks and other banks as well, have kicked in, raising capital requirements and placing further stress on supervision and internal systems, particularly of risk management. India would do well to adopt the global best practices and not just higher capital requirements.
To truly insulate the taxpayer from the bill for cleaning up the mess of a bank failure, a legal framework must be put in place for resolution of financial institutions, identifying the sources of capital that can be bailed in.