Rajan, Acharya suggest scrapping of Financial Services Dept in FinMin for PSBs' independence

Former Reserve Bank of India (RBI) governor Raghuram Rajan and former deputy governor Viral Acharya have together proposed winding down of Department of Financial Services in the Finance Ministry. The duo, in a paper suggesting "reforms that could allow banking activity to grow significantly without the periodic boom-bust cycles it has been subject to", has suggested that scrapping the Financial Services department is necessary as a signal of intent  to  grant  bank  boards  and  management independence. It's also essential as a commitment not to engage in "mission creep" when compulsions  arise  to  use  banks  for  serving  costly  social  or  political objectives, the paper said.

"Dealing with (loan) distress is most immediate, but the creation of empowered public sector boards is also possible now - the Department of Financial Services simply has to hand over power to the Bank Board Bureau, which would further delegate the power of appointment of all top management and non-government directors to the reconstituted boards of the banks."

The two also bat for introducing longer terms for senior management, better assessment of performance, performance-based promotions and extensions as a reform for the public lenders. The paper argues about tweaking ownership structures at banks. Rajan and Acharya suggest  trimming government stake below 50 per cent in some PSBs and re-privatisation of some of these banks.

The two economists say that bringing change to the legislation which governs nationalised banks and subsequently selling government stakes below 50 percent will only follow smoothly once the bank boards start exercising their powers effectively. "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," the paper added.

Even though India has a low credit to GDP ratio, the banking system has among the highest gross non-performing assets (GNPA) to total assets ratio globally, the two said in the paper. Combined with the negative impact of the coronavirus pandemic, it becomes important to bring in more reforms in the banking sector at the earliest, they added.

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