RBI distances itself from writeup suggesting govt ought to go slow on privatizing banks

The Reserve Bank of India (RBI) on Friday evening distanced itself from an article penned by its Banking Research Division in the Department of Economic and Policy Research on the government adopting a ‘big bang’ approach to privatisation of Public Sector Banks that said it would do more harm than good.

The article, which was accompanied by the usual disclaimer that the views expressed are those of the authors and do not reflect the views of the organization, was published in RBI’s August bulletin issued on Thursday.

The article, pushing for a more gradual withdrawal of State control has been written by Snehal S Herwadkar, Sonali Goel, and Rishuka Bansal of RBI’s banking research division of the Department of Economics and policy research.

Finance minister Nirmala Sitharaman had announced in the Union Budget for FY22 that the Union government will pare its stake in two State-owned lenders apart from IDBI Bank, without specifying any names.

The article argued in favour of its position by citing evidence that public sector banks (PSBs) are not just motivated by the profit maximisation goal and, in contrast to their private counterparts, have incorporated financial inclusion goals into their objective function. According to this, certain recent financial sector reforms would also strengthen these institutions.

"Our findings further highlight the counter-cyclical nature of lending by public sector banks. These banks have recently seen an increase in market confidence. Data suggests they survived the COVID-19 pandemic shock remarkably well, despite criticism of their poor balance sheets,” it claimed.

According to the report, the recent mega-merger of ten State-owned banks has led to sector consolidation and the creation of stronger, more resilient, and more competitive banks.

Apart from that, it claimed that the creation of India's ‘bad bank’, National Asset Reconstruction Company Ltd (NARCL), will aid in removing the legacy load of defaulted loans from their balance sheets.

According to the report, the recently established National Bank for Financing Infrastructure and Development (NABFiD) will offer a different avenue for funding infrastructure, allaying the concerns of public sector lenders about asset-liability mismatches.

On Friday, the RBI issued a clarification which said, “As clearly stated in the article itself, the views expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India. The Press Release relating to the August 2022 Bulletin highlights that “the gradual approach to privatisation adopted by the government can ensure that a void is not created in fulfilling the social objective of financial inclusion".

“From the conventional perspective that privatisation is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it," it went on to add.