State-run banks should be freed of constraints: Raghuram

Public sector banks might perform better if they are freed from some of the constraints they operate under but such freedom typically requires distance from the government, says former Reserve Bank of India governor Raghuram Rajan.

He is also of the view that there is no guarantee that privatisation will be a panacea.

Much of the discussion on privatisation, he says, seems to make assumptions based on ideological positions.

"Certainly, if public sector banks are freed from some of the constraints they operate under (such as paying above the private sector for low-skilled jobs and paying below the private sector for senior management positions, having to respond to government diktats on strategy or mandates, or operating under the threat of CVC/CBI scrutiny) they might perform far better," he says.

However, Rajan feels that such freedom typically requires distance from the government. "So long as they are majority-owned by the government, they may not get that distance."

Some private banks, according to him, have been poorly governed.

"Instead, we need to recognise that ownership is just one contributor to governance and look at pragmatic ways to improve governance across the board. There certainly is a case to experiment by privatising one or two mid-sized public sector banks and reducing the government stake below 50 per cent for a couple of others, while working on governance reforms for the rest," Rajan says.

In this case, "rather than continuing a never-ending theoretical debate, we will then actually have some evidence to go on. Some political compromises will be needed to allow the process to go through, but so long as the newly privatised banks are not totally hamstrung in their operational flexibility as a result of these compromises, this will be an experiment worth undertaking", he argues.