Letter to BS: IMF warns India over PSBs, advocates privatisation

Apropos “Sovereign-banks nexus a worry: IMF”(August 9), the International Monetary Fund (IMF) has in its Country Report on India under Article IV, cautioned India against the macro-financial risks that have emerged from the government ownership of public sector banks (PSBs). The IMF had underscored the vulnerabilities emanating from this nexus and stressed the importance of a comprehensive plan to improve governance, internal control and operations of PSBs. Earlier, the Financial Sector Assessment Programme (FSAP) in its financial stability part on risk assessment had emphasised the need for recapitalisation of PSBs along with their restructuring. It also spoke about the need for attracting private capital and improving the operations of PSBs, especially to strengthen governance and internal controls. 
 

In the last few years, very little has been done to improve governance, whether at the board level or top management. No attempt has been made to professionalise the functioning of PSB boards. Political appointees continue to be present on the boards, while RBI senior officers serve on PSB boards resulting in conflict of interest. Similarly, there has been no attempt to reform, with a view to improve, the appointment and functioning of the top management of PSBs. The internal controls of PSBs continue to be weak, due to the sheer gamut of work being done by them. Further there is minimal use of technology in internal controls, lack of functioning checks and balances in operational risk and poor quality of manpower/infrastructure being assigned to the internal control/audit departments. 
 

The result is the difficulty in attracting private capital and retail investors to put their money in huge loss-making, unreformed and often fraud prone entities. Consequently, the government has to periodically use the taxes collected from tax-payers as well as solicit extraordinary dividend from the central bank and the few profit earning public sector financial institutions and industrial undertakings. Successive governments have capitalised on the fears of the depositors of these problematic PSBs in particular, and the public at large, to say that if these entities are not capitalised, the financial system will collapse and depositors’ interest will be impacted. But they never carry out substantive reforms so that these entities don’t face the same situation after every few years. It is easier and politically more expedient to play on the fears of the depositors and the public from time to time rather than carry out reforms of PSBs that control about 65 per cent of the total assets of the banking system in the country and on whom a large part of the country is dependent as their sole means for accessing the financial system.
 

Arun Pasricha  New Delhi

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