The attempts to fix the governance problems in public sector banks (PSBs) will not work unless the weaker banks find a business model that sticks to their core objectives - financial inclusion and development banking, says Viral Acharya, former deputy governor of Reserve Bank of India.
In an interaction with Business Today, Acharya said that even amalgamations cannot serve that purpose, other than reducing the number of appointments. "The idea that we will somehow fix the governance problems of the PSBs is not going to work. It's such a huge task. The only reason why I favour amalgamations is that it reduces the number of appointments. Half of the time, many of these positions are not even filled. I see only two parts that can work. One, the healthier banks can be floated in the market, they can find ways to get capital. For others, we should find niche business models that work," he said.
According to Acharya, PSB banks need to do what they are supposed to be doing. "What is the justification given for the existence of PSU banks? It's about financial inclusion, its about development, its about serving a poor country, etc. All of those problems have nothing to do with the loans (NPAs given out by banks). They got into this trouble because they were doing universal banking, they were giving loans to the largest corporations of India. So if you want ownership of banks that are on the forefront of financial inclusion, they need to operate like Bandhan Bank," he said.
He said Indian PSBs need to figure out innovative ways to underwrite small loans and find technology to recover small loans and create more accounts. "The track record of this (small loan disbursals) has been okay. But if I have to pick the last 10 years, the best providers of financial inclusion, other than Jan Dhan accounts, are all in the private space," Acharya said.
The weaker banks will not have options to go private as they will not find takers to invest in them or buy them out, so such PSBs will be around with government ownership, Acharya notes. The only way forward for such banks is to focus on niche business models, he says, adding that right now their relative expertise is not clear.