rbi: Public where private gaps will remain: RBI Gov Shaktikanta Das

Shaktikanta Das clarified this week that RBI is agnostic to ownership, following the publication in its monthly bulletin of an article that argues for slower privatisation of public sector banks (PSBs). The paper found that PSBs had performed better in development finance and monetary transmission metrics, even though they lag in profitability. RBI, which apart from being monetary authority and banking regulator is also GoI’s debt manager, can understandably not endorse any point of view on the benefits of the ownership structure of the entities it regulates, particularly with GoI already having signalled its intention of withdrawing from the lending business.

There is evidence that an earlier bout of stress that built into the banking system had its roots in the governance structure that affects PSBs’ ability to assess risks. GoI, which has an overlapping regulatory role with RBI for PSBs, has spent a considerable amount to provide for their bad debts. This was followed by a round of mergers to improve their marketability. Markets seem to endorse private ownership, according to less fancy valuations to government-owned lenders. Nirmala Sitharaman had announced in Budget 2021-22 that two PSBs would be privatised.

Government of India can be expected to be as sensitive to India’s development finance imperatives as any independent regulator. The pace of privatisation will be determined by factors beyond market dynamics. Private ownership has delivered on financial inclusion, although not on the scale of PSBs. Private banks have also made great strides in efficiency. Banking will eventually have to fall into the liberalisation template where the private sector plays the dominant role and PSBs fill gaps in the market economy.