Chief Economic Adviser, Arvind Subramanian addressing a press conference after laying of the Economic Survey 2016-17 in Parliament, in New Delhi on January 31, 2017. (Photograph: PIB)

Arvind Subramanian Says India Needs To Rethink Public Ownership Of Banks

Chief Economic Adviser Arvind Subramanian said the government needs to rethink public ownership of banks and the fraud at the nation’s second-largest state-owned bank was an opportunity to push through banking reforms.

“We need to think whether public ownership per se has kind of aggravated some of the governance issues for banks, the government and the regulator,” Subramanian told BloombergQuint after a public lecture at the Delhi School of Economics today. Thegovernment needs to have a more radical banking sector reform agenda to prevent problems from recurring, he said.

Public sector lenders account for about 90 percent of Indian banks’ bad loans worth more than Rs 8 lakh crore, partly attributed to lending during the last boom and partly to government issues. The Rs 13,000-crore overseas loans availed by jewellers Nirav Modi and Mehul Choksi on allegedly fraudulent guarantees issued by some employees of a Mumbai branch of Punjab National Bank underscore operational risks.

“We need to better regulate,” Subramanian said.

We need to [also] think public sector ownership because many of the governance problems that you see, they don’t go away in the private sector, but they considerably accentuate and get exacerbated because of the ownership.
Arvind Subramanian, Chief Economic Adviser

Subramanian said the government needs to take fresh measures to overcome the twin balance sheet challenge of non-performing assets of banks and companies buried under debt.

“…The government took two very important steps: IBC [new bankruptcy law] process for cleaning up corporate balance sheets, recapitalisation of the banks,” he said. “All those efforts risk being set back by all the new stuff that’s happened.”

The government faces questions about the amount of stressed assets in the system, and if this would lead putting more resources in state-owned banks. India has already announced a Rs 2.11 lakh crore recapitalisation plan, of which nearly Rs 90,000 crore will be injected in the year ending this month.

“We now do face questions about what’s the true nature of amount of the stressed assets in the system,” he said. “Will there be need for more resources, if we think of pouring in more resources, [then] under what conditions?”

The Economic Survey 2017-18 had pointed out that expeditious resolution of stressed assets through the Insolvency and Bankruptcy Code may require the government to provide more resources public sector banks. More so, if the haircuts required are greater than previously expected, the ongoing process of asset quality recognition uncovers more stressed assets, and if new accounting standards, or Ind-AS, are implemented.

Recapitalising, regulating and ownership of banks will be government’s priorities, he said.

Fed Rate Hike Impact Unlikely

Subramanian said the hike in lending rates by the U.S. Federal Reserve has already been factored in, and the only new element is there will be increase in interest rate thrice in 2019.

The Federal Open Market Committee raised the benchmark lending rate a quarter-point citing an improving economic outlook. Projections by Fed officials implied three rate hikes next year, compared with two expected in the last round of forecasts in December.

Watch the full interview here.