Excessive, ‘holier than thou’ regulations, brought in as part of an effort to clean up the banking system, are preventing public sector banks (PSBs) from growing out of the stressed asset crisis, NITI Aayog Vice-Chairman Rajiv Kumar said here on Friday.

Addressing corporate chieftains after a ‘Breakfast with BusinessLine ’ event, Kumar said: “We have tried to enforce prudential and regulatory norms on the banking sector which are far in excess of what you need. As a result, PSBs are unable to grow out of the crisis. I think it will be a while before you can get a more pragmatic approach in the banking sector.”

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The Chinese example

Drawing comparisons with Chinese banks, he noted that many of them had huge NPAs at one point. But they were supported to go to the market and, as a result, five of them managed to find a place among the top seven banks in the country.

Kumar laid out the path to revive PSBs and their divestment. More than recapitalisation, what they need are major governance measures, he said. While the ‘lazy banking model’ — where money is lent based on phone calls, without a thorough assessment of credit-worthiness — has been curtailed, governance issues are very critical and require attention, he observed. If this is not done, it will lead to repeated bailouts of PSBs.

“The governance structure or the culture in PSBs comes with zero accountability to performance. The risk-reward equation is skewed in favour of zero risk, and so bank managers are risk-averse,” he said.

Asked about the divestment of PSBs, he pointed out that much more clean-up work was required before taking them to the market. Consolidation, clean-up and service improvement are required to be front-loaded. “They will have to be brought to a certain level of efficiency before divestment.”

While NITI Aayog has been involved in the process of recommending stake dilution or privatisation of public sector organisations and has brought out five lists so far, it has not included any bank in the list, he pointed out.

Kumar said NITI Aayog was keeping a close watch on the macro-economic situation, and assured that India’s macro situation is nowhere near as vulnerable as it had been earlier. Though the rupee has weakened, it has not depreciated beyond the real effective exchange rate level. The current account deficit will be enhanced by capital flows, the fiscal deficit is under control, and the growth rate is improving despite the fact that commercial banks’ credit flow to the industry is weak.

He felt that once the ongoing clean-up efforts take effect, commercial banks would resume their duties to lend and there will be an upturn in the business cycle. When the upturn starts, it will last for a long time due to the clean-up, formalisation and efficiency brought into the system.

The discussion was moderated by Raghavan Srinivasan, Editor, BusinessLine .

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