Need to divest stakes in public sector banks in graceful manner: Viral Acharya

Former RBI Deputy Governor Viral V Acharya on Friday cautioned against fire sale of state-owned lenders, saying that disinvestment should be undertaken in a graceful manner at the right price and also made a case for privatisation of some healthy public sector banks.

Divestment beyond majority stake is the first step because it will help relax the fiscal constraint in terms of dependence of public sector banks on the government for capital, he said at a virtual event to release his book titled 'Quest for Restoring Financial Stability in India'.

"Perhaps reprivatisation of some of the healthiest public sector banks should also be on the table," he said.

Citing the example of the South Asian crisis in 1997, he said that a large number of public sector banks in the region had to be privatised post the crisis and in many cases were sold at fire sale prices to private equity investors from abroad.

"I am visualising that we should not end up in this scenario. In my view, it would be better to actually divest stakes in a graceful manner at right prices...," he said.

Besides relaxation of the fiscal constraint, Acharya said privatisation would bring with them modern technology, fintech capacity, modern credit scoring capacity, risk management capacity and the ability to attract human capital with the right incentive compensation structures.

In May, Finance Minister Nirmala Sitharaman announced that there will be a maximum of four public sector companies in strategic sectors while state-owned firms in other segments will eventually be privatised.

This will be part of a new coherent Public Sector Enterprises Policy to be formulated to push reforms in central public sector enterprises, she had said.

At the virtual event for the book release, Acharya was asked about question marks on governance in the private sector banking space and he replied that there will be failures.

"There have been failures of governance in the private sector banks. But I think one should separate what is a systemic problem in a part of the banking sector, notably in the public sector banking... with what are idiosyncratic issues in a few banks in the private sector banking," he said.

Acharya also said that because RBI does not distinguish in its rules between public sector banks and private sector banks, other than what the law requires, it is forced to actually adopt weaker standards for the system as a whole.

"If we reduce the stakes of the government in the banking sector besides the back door privatisation, that was mentioned, I think we will actually lift the quality of regulation for the system as a whole," he added.

Acharya, who reportedly had differences with the government, quit as RBI Deputy Governor in July 2019, six months ahead of his three-year term.