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    Did Raghuram Rajan call bank privatisation a mistake after batting for it?

    Did Raghuram Rajan call bank privatisation a mistake after batting for it?

    Did Raghuram Rajan call bank privatisation a mistake after batting for it?
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    By Yashi Gupta   IST (Updated)

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    Raghuram Rajan is against selling the PSBs to industrial houses and corporates. He is not against privatization.

    Tweets on Raghuram Rajan’s “colossal u-turn” is making rounds on the internet after he branded privatising public sector banks or PSBs ‘a colossal mistake.’ However, is there more to the statement than what’s being made out?
    The former RBI governor had said, “I think it would be a colossal mistake to sell the banks to industrial houses.” Yet in September ‘20, he suggested that the government privatize select PSBs.
    What is noteworthy is that between September ‘20 and March ‘21, another event happened. In November ‘20, RBI’s internal working group (IWG) reviewing the corporate structure of PSBs suggested a sweeping change in the bank ownership: Allow large corporate and industrial houses to own banks.
    Now let's go back to what Rajan said on Monday:
    “I think it would be a colossal mistake to sell the banks to industrial houses.”
    In the context of the November ‘20 proposal, Rajan’s statement is against selling the PSBs to industrial houses and corporates and not against privatization per se.
    In Budget 2021, FM Nirmala Sitharaman had announced the privatization of two PSBs and a general insurance company. Bank employees who feared losing their jobs due to this held a two-day strike to oppose the decision. Rajan’s statement came on the first day of the strike.
    What is the difference between privatization and selling to corporates?
    Privatization means selling a majority stake to non-government players like institutions and individuals. It aims to free banks from the strict regulations of the bank nationalization act. All these investors own 51 or more per cent of banks’ equity. This equity is divided into investors so that no one entity can exercise too much control over the board.
    The fear for many economists, like Rajan, is that investors might not be interested in owning a 1-5 percent stake in an inefficient PSB. This, combined with incomplete details of implementation, encouraged speculations on govt’s next step. Speculation in line with IWG’s suggestion of bringing corporates onboard. The fear is that banks might become subjugated to the corporate that owns them as there may be a case of the borrower owning the bank.
    Why is Rajan against corporates owning banks?
    When IWG came up with the suggestion to let industry houses own banks, Rajan and ex-deputy governor Viral Acharya had slated the suggestion as a “bombshell.”
    Both economists argued that granting corporates access to banks will make financing easier for them. And the “history of such connected lending is invariably disastrous.”
    IWG had made this recommendation even when all experts except one had advised against it. (Four former RBI deputy governors, two bankers, one lawyer, one consultant and a private equity player were the experts).
    But IWG justified its recommendation by suggesting measures to keep banks in check.
    Rajan had argued that a central bank cannot prevent the cases of bad loans, despite having access to resources. How would it then avoid the conflict of interest between banks and their new owners?
    “Even an independent, committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending. Information on loan performance is rarely timely or accurate…if sound regulation and supervision were only a matter of legislation, India would not have an NPA problem,” he had said.
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