The reform of public sector banks so far by Prime Minister Narendra Modi-led NDA government is a "still-born effort," said former RBI governor Raghuram Rajan and former deputy governor Viral Acharya in a newly released research paper.
"Following the PJ Nayak Committee report of 2014, the government brought a variety of key players together to a Gyan Sangam in early 2015, which recommended the setting up of a Bank Board Bureau to make public sector bank appointments, and the creation of strong empowered bank boards that would allow banks to have differentiated strategies (one lament heard there was that every public sector bank branch looked similar, no matter which bank it belonged to and no matter where it was located)," the paper said.
"These ideas were supported by the Prime Minister. Yet five years later, it appears that little has changed," it added.
The paper suggested the government to privatise select public sector banks, set up a bad bank to deal with NPAs, and dilute the role of the Department of Financial Services. The reforms are necessary to ensure growth of the banking government without the periodic boom-bust cycles, said the paper titled ''Indian Banks: A Time to Reform?''.
"Re-privatisation of select PSBs can then be undertaken as part of a carefully calibrated strategy, bringing in private investors who have both financial expertise as well as technological expertise; corporate houses must be kept from acquiring significant stakes, given their natural conflicts of interest," the paper also said.
Noting that the government obtains enormous power from directing bank lending, it said sometimes this power is exercised to advance public goals such as financial inclusion or infrastructure finance, sometimes it is used to offer patronage to, or exercise control over, industrialists.
While Rajan was head of the central bank between 2013 and 2016, Acharya served as RBI deputy governor between 2017 and 2019.