Participation from private sector in public sector banking and better external regulations are the key for reforming banking industry, said Arvind Subramanian, Chief Economic Advisor, Government of India.

Addressing the Madras Management Association Annual Convention 2018 on the topic ‘Learning to Grow’ in Chennai today, Subramanian, said that with series of happenings around public sector banks (PSB), from close down of Bank of Baroda’s South Africa branch to the Punjab National Bank’s fraud recently, the industry is troubled.

“What we are facing is twin balance sheet challenge,” he said. On one hand banks are saddled with non-performing assets and we have corporates on the other, which have borrowed too much for growing their business and accumulated debt they are unable to repay. This has resulted in low investment in businesses since banks are unable to extend credit.

Subramanian proposed that the banking sector follow five ‘R’s to straighten itself – recognition, resolution, recapitalisation, reform and regulation.

First step to solve an issue is to recognise there is one and quantify the magnitude of the problem, he said. You need to know how much assets are really stressed and pass a resolution. “We are making progress in this aspect with the Insolvency and Bankruptcy code,” Subramanian added. The Centre has allocated ₹2.1 lakh crore to recapitalise public sector banks, which is also in the right direction.

However reforming and regulation of the banking sector is difficult and challenging. There is a need to ensure that tax payers money is protected from risks and are used efficiently. While reform in PSB governance is one way, there is no guarantee that it would lead to improvement.

Subramanian said that allowing participation of private sector, exercising better internal controls and appointing external controls to complement them is a better solution.

Currently public sector ownership handicaps PSBs in terms of restrictions imposed on recruitments and in decision-making process. “We need to relieve them of that,” he added.

The need of the hour, Subramanian said, is a better regulatory system, external and internal, to safeguard the banks against another PNB-type fraud.

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