Saving Banks~II

Scams are a product of greed and immorality. However, abuse of the financial system has been made possible because of the system's weaknesses. In an age which heralds technology as the silver bullet, we should not overlook the most critical source of competitive advantage the people. Compliance and controls are dependent on the people running it. The most agile auditors will struggle to stop managers determined to hide their dirty laundry from view

- MOIN QAZI

Government ownership of banking continues to be widespread, despite evidence that the objectives of such right are rarely achieved. There is broad consensus on reducing state ownership, if not eliminating it.

However, privatization must be designed carefully if it has to deliver tangible benefits. While regulation and supervision are paramount, the system must create incentives to maximize the number of motivated and vigilant eyes.

There should be a reward for prudence of senior management because it will lead to safe banking. Compensation packages should be designed appropriately to adhere to risk mitigation principles. High bonuses for business targets will only attract high-risk-takers. Moreover, the preferred strategy for supervising individual institutions should be to have a few principal monitors and allow diversity in the set of other monitors because the profile and environment of each institution are unique.

There are still glimmers of hope if the past is any guide. As former RBI Governor Y V Reddy underlined recently, the bad loan situation was a great deal worse in 1996-97 than it is now.

The ratio of NPAs to gross advances of 11.6 per cent in March 2018 is way below the percentage of 17.8 per cent in 1996–97. Banking analysts feel that the capital infusion announced for PSBs in 2017 to the tune of Rs 2.1 trillion is inadequate, and much more needs to be done to heal the banks.

Governments opposed to ownership roles in banking may find it imposed on them in a crisis. The authorities must then focus on getting out as soon as possible. Drawing on public funds to recapitalize weak banks may be unavoidable, but they must be used sparingly.