Chennai, Mar 15: Government holdings in public-sector banks should be brought down to 31% from 51% for better oversight and prudential governance, said former Planning Commission of India deputy chairman Montek Singh Ahluwalia on Thursday. Ahluwalia was in Chennai to attend the golden jubilee celebrations of Industrial Economist magazine.
“One fear with reducing government control is the need for social welfare. What about agriculture and priority sector lending? All these social purposes can be served if the government has a dominant 31% stake in public sector banks,” he said.
On the Punjab National Bank scam and the issue of bad loans, he said, “In the long run we all are dead. Most economic forecasting gets to operate under the opposite assumption that we will be able okay in the long run. I’d agree that the present incapacity of the banks is a huge impediment of the economy. But how to fix it? The usual remedies when it comes to public sector banks is with every problem – there is a little more oversight, more scrutiny, and a few tweaks here and there. But essentially this does not solve the problem. There are others who say ‘Privatise the banks and all will be alright.’ But it has been proved time and again – in other countries too — that private sector banks can also badly go wrong,” said Ahluwalia.
He said the general theory of “market equilibrium will be at play does not work in the question of banks. Banking does need strong regulation. But the present legal system does not empower the Reserve Bank of India (RBI) to act as regulator.”
“When private banks get pulled up, the RBI has the authority to ask for a change in the chairman, the board and the top executives at the bank. But they do not have this authority with PSBs because of the ‘I’ factor. The government believes strongly in the idea of unquestioned sovereignty – If ‘I’ have decided it should be good enough. How can anyone less than the sovereign authority have the power to over-rule a decision? This dual structure of regulation disempowers RBI,” said Ahluwalia.