Viral Acharya wanted Indira Gandhi’s masterstroke reversed

In various sections of the press, the media has projected Viral Acharya as a singer, sportsman, lyricist and author. But there is more to this new deputy governor of the Reserve Bank than just his multi-talented and colorful personality.

Acharya proposed repealing the Banks Nationalisation Act, 1970 and 1980, introduced by former Indian prime minister Indira Gandhi. He also proposed privatising a large number of public-sector banks in India.

He made these suggestions in an academic paper titled ‘State intervention in banking: the relative health of Indian public sector and private sector banks’, which Acharya co-authored with Krishnamurthi Subramanian of the Indian School of Business. The paper was published in June 2015, when Acharya was a professor of economics at New York University.

In the paper, Acharya and his co-author extensively detailed the problems plaguing public-sector banks in India. The paper identified systemic risks to public-sector banks, primarily arising out of increase in their debt liabilities. It also pointed out that the return-on-assets of state banks had been declining consistently over the years. One of the highlights of the paper was that it pointed to a higher risk faced by public sector banks owing to higher operational inefficiency. This manifests in various forms. Not only is the profit per employee in public banks lower than their private sector counterparts, the very people working in state owned banks pose a risk to their existence.

The paper further extrapolates this risk caused by the banks human capital. It quotes a 2013 McKinsey report to state that 60 to 90% of the middle management in state run banks will retire by 2016-17. The staff shortage that will be caused in the coming years will be further exacerbated by the Viral Acharya limitations on the decision making capabilities of the banks staff. Since public sector bank employees are always under the scanner of vigilance and investigative agencies, their decision making capabilities are not as efficient as private banks.

Acharya then proceeds to provide a solution to address these problems in the concluding part of his paper. His solution is to repeal the Bank Nationalisation Acts 1970 and 1980 along with SBI Act and the SBI (subsidiaries) Act. The report states, “In order to improve governance of public sector banks, the Government must distance itself from several bank governance functions that it presently discharges. For this purpose, the Bank Nationalization Acts of 1970 and 1980, together with the SBI Act and the SBI (Subsidiary Banks) Act must be repealed. All banks be incorporated as regular corporations under the Companies Act and must be mandated to satisfy the corporate governance norms prescribed by the Securities Exchange Board of India.”

The Indira Gandhi government had nationalised 14 private banks in 1969 through an ordinance. In 1980 another 6 private banks were taken over by the government. With these two phases of bank nationalisation, the government came to control more than 90% of India’s banking system. The SBI Act 1955 meanwhile had taken over the Imperial Bank and christened it as SBI with the Reserve Bank of India being its shareholder.

Acharya also goes on to suggest mass scale privatisation of other banks as well. The paper states, “Over the long run, some of the public sector banks can be privatized or their assets reallocated. Some of them could be acquired by the relatively well-capitalized private sector firms; the ones with worst asset quality could be wound down; and, greater entry of smaller and newer banks can be enabled to yet maintain healthy levels of competition.”

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