Government, RBI Must Treat Public And Private Banks Equally, Says Rajan

The government and the Reserve Bank of India should, over the medium term, reduce the difference in the regulatory treatment of government-owned and private banks, outgoing RBI Governor Raghuram Rajan said in an address.

He was speaking at a banking summit organised by the Federation of Indian Chambers of Commerce and Industry and Indian Banks’ Association.

Highlighting the disparity between public and private banks, Rajan said, apart from meeting all the regulatory requirements (like private banks do), public sector banks also have to follow government mandates such opening bank accounts under the Pradhan Mantri Jan-Dhan Yojana and disbursing loans under the MUDRA scheme. They also have to follow inflexible rules on hiring.

In return, public sector banks get a larger portion of business from the government, and a larger chunk of its deposits. Additionally, they have the advantage of being backed by government credit, he said.

Some of the difference between public and private sector banks, especially when it comes to executing the government’s programmes, can be mitigated if the government began paying an adequate price for its mandates.

“For example, when every direct benefit transfer is paid a remunerative price, all banks have an incentive to undertake the business and open basic customer accounts,” said Rajan. “The most efficient bank will garner more business, and the payment can be gradually reduced over time, commensurate with the accrued efficiencies.”

Rajan stressed the need to improve talent acquisition by public sector banks. Like many government-owned companies the world over, India’s public sector banks pay their low-level employees better than their private sector counterparts. Conversely, the higher management is paid much less. “This makes it hard for them to attract top talent, but makes it easier to attract good people at lower levels,” said Rajan.

It is possible, he said, to improve the governance of public sector banks by enabling new hires to rise up the ranks quickly, with the aid of technology and training.

Rajan also suggested that public sector banks petition courts to allow them to have access to campus hiring. Currently, government banks can only hire through entrance exams. The irony is not lost on Rajan, who pointed out that most of the graduates from the government-bank-supported National Institute of Bank Management end up at private sector banks.

The governor said that the pipeline for project financing in India is very large, with airports, roads, railway lines, and power plants being planned. But, banks must approach this opportunity differently than they did in 2007-08, when “exuberance” got the better of them.

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