Privatising PSBs: Ex-RBI Guv suggests 10-yr road map

New Delhi: Former RBI governor D Subbarao has suggested that the government should come up with a 10-year road map for privatisation of all Public Sector Banks (PSBs) as it would provide much needed predictability to stakeholders. Subbarao further said that the big bang approach to privatisation of state-owned banks is not desirable but at the same time the issue should not be put on the back burner.

"Ideally, we should have a road map, maybe over a 10 year timeframe, to privatise all PSBs. "That will give much needed predictability to all stakeholders," he said.

Meanwhile, Subbarao said the government should also be thinking about corporatisation of public sector banks so that they come within the umbrella of uniform RBI regulation. In the Union Budget for 2021-22, the government announced its intent to take up the privatisation of two PSBs in the year and approved a policy of strategic disinvestment of public sector enterprises.

The government think-tank NITI Aayog has already suggested two banks and one insurance company to the Core Group of Secretaries on Disinvestment for privatisation.

According to Subbarao, the impact on the Indian economy of privatisation of PSBs will be in two ways. "The overall efficiency of the banking system will improve as public sector banks, freed from the obligation of driving social objectives, will pursue profit maximisation like their private counterparts," he said, adding that the pursuit of social objectives like financial inclusion and priority sector lending might, to some extent, be compromised. Even so, Subbarao said he believes the net cost benefit calculus of privatisation will be positive.

In 2020, the government merged 10 nationalised banks into four large lenders, thereby bringing down the number of PSBs to 12. The former RBI governor observed that at India's current stage of development, the country should be using other instruments to pursue social objectives rather than continuing to place the burden on bank depositors and borrowers.

A research paper published in the August 2022 issue of RBI Bulletin had said "the gradual approach to privatisation adopted by the government can ensure that a void is not created in fulfilling the social objective of financial inclusion.

Asked whether high inflation will become the norm in India and if the country's inflation targeting regime faces its biggest test at the moment, Subbarao said he believes the RBI's monetary policy action as well as possible base effect will help bring inflation down to 4 per cent over the next two years.

RBI has been mandated by the government to ensure that inflation remains at 4 per cent with a margin of 2 per cent on either side. Noting that monetary policy action will involve raising interest rates and withdrawing liquidity which RBI has already started, Subbrao said there is a case for further tightening although he cannot speculate on how much.