As discussion continues whether private players should be allowed in the Indian banking space, Nobel laureate Abhijit Banerjee pointed out how foreign participation can save the bleeding sector. Banerjee said that Indian banks need a huge capital infusion to stay viable that can come easily from foreign sources.
Banerjee noted that once we take on the view that banking sector needs more private ownership, restricting it to Indian ownership will be a mistake.
"There is a new report by the Reserve Bank of India (RBI) that is treading on new grounds, but I think it is very important to talk about, for example, involving foreign banks in Indian banking sector," he said at the TiE Global Summit 2020.
"I think we have some ideological view that Indian capitalists are somehow good capitalists and foreign capitalists are bad capitalists. We're staring in the face of the large defaults by Indian capitalists, and our banks are a complete mess. We have enormous bad debt and we actually have no way of even writing it down, unless we get some capital inflow from abroad. I don't think anybody else will have the deep enough pockets to write down that debt," he added.
Terming it the zombie banking sector, Banerjee said a lot of players in the Indian banking sector know that they will not be viable if their books are scrutinised. This would encompass public as well as private banks, and a bunch of NBFCs. Banerjee said that Indian banks are not lending due to the lack of capital and the required capital infusion can come much easily from abroad that compared to India.
"We have to understand that when credit was easy, the economy grew, but today our banking margins are among the highest, the gap between the borrowing rate and the lending rate of banks is among the highest in the world," the Nobel laureate said.
Banerjee said the discourse over foreign capital can be dangerous and the apprehension towards foreign capital stems from an obsolete colonial mindset. "I don't think foreign capital is more irresponsible than Indian capital. This is a colonial mindset. It's been a long time since we've had a foreign rule over us, we are a $3 trillion economy now," he said
He said we have been defensive to suit a particular group of capitalists who have the cash to get whatever is going cheap. Earlier he said the notion that we will suspect foreign capitalists in banking, overstates how loyal India's capitalist class has been.