MC Interview | Dual control of PSBs by finance ministry & RBI is wrong: Montek Singh Ahluwalia

highlighted that constitutional reforms like the Insolvency and Bankruptcy Code (IBC) take a certain amount of time to settle in.

The dual control of public sector banks (PSB) by the Ministry of Finance and the Reserve Bank of India (RBI) is fundamentally wrong, said Montek Singh Ahluwalia, economist and former Deputy Chairman of the erstwhile Planning Commission of India.

"The maintenance of dual control, which means that the RBI does not have the same power to regulate a PSB as it does vis a vis a private sector bank, is fundamentally wrong. I do not believe that a bureaucrat from the ministry is going to improve the working of PSBs," said Ahluwalia.

The veteran economist added that the ultimate responsibility of regulating a PSB, including removing the Chairman, if necessary, should rest with the RBI, as is the case with private sector banks.

He highlighted that constitutional reforms like the Insolvency and Bankruptcy Code (IBC) take a certain amount of time to settle in.

Edited excerpts from his interview with Moneycontrol.

You’ve earlier mentioned that PSBs need to be rid of dual ownership. How do you view the same given the record growth of PSBs in the past few months?

The need to get rid of dual control is not related to short-term performance. The maintenance of dual control, which means that the RBI does not have the same power to regulate a PSB that it does vis a vis a private sector bank, is fundamentally wrong. I do not believe that a bureaucrat from the ministry is going to improve the working of PSBs.

Now, I recognise that PSBs have to meet certain social objectives, but that can be done by defining rules for different types of lending. But the ultimate responsibility of regulating and governing a PSB, including removing the Chairman, if necessary, should rest with the RBI, as is the case with private sector banks.

Getting rid of dual control will make the banking system more efficient.

The RBI has kept the repo rate the same in the past five policy meetings. Going forward, how do you see the RBI managing the repo rate?

RBI has done the right thing by keeping the rate unchanged. Despite rising inflation, they have not raised rates, possibly because it takes anything from three to six months for the proper transmission of rates through the economy. If they think that six months from now the global economy might be beginning to recover, some supply restrictions might ease, and inflation may tail off, it may make sense to hold on to the repo right now.

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I am certainly not in favour of increasing rates, but nor am I in favour of aggressively cutting rates to get the growth up. At the current inflation rate, which is above the target but not that high, the interest rate is good enough.

How do you look at the privatisation of PSBs?

Privatisation of PSBs is a good thing. But it’s not clear if we will ever get around to doing it. Firstly, the issue is whether a particular PSB plays a major role in the banking sector or not, and secondly, privatising a PSB will always be controversial. Thus, privatisation seems to be limited to small PSBs which are not doing particularly well. I don’t think that is going to make much difference to the efficiency of the banking system.

You’ve said that there is a need to improve the efficacy of the IBC. What is your current take on the IBC, and how do you see it working for banks?

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In all these complicated constitutional reforms, it takes a certain amount of time for the system to settle in. Given the situation of our judicial system and the possibility of endless appeals, IBC will take a little time, but I think we should persist.

Part of the problem was the definition of creditors, particularly when it came to real estate, etc. The objective was to protect secured creditors, because that leads to an improvement in the functioning of the capital market. As long as that vision is clear, and hopefully the judiciary also understands it, we will make progress. But I would not be surprised if there are a few glitches.

What’s your view of the non-banking and fintech space?

RBI has done a good job of expanding the scale of private sector banking. What’s exciting is that everything is getting disintermediated. Even some private sector banks look old-fashioned with all these fintechs buzzing around, and while some banks are collaborating with them, some are not.

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It will be interesting to see whether the RBI is able to maintain a flexible approach when it comes to regulating this third tier of banking. Obviously, fintechs are to be regulated with a lighter touch than high-street banks, but that doesn’t mean you end up with an IL&FS type of disaster (it took on too much debt). It is a tough job and those managing the financial sector have done well to bring about a transition that’s attracting many newcomer