India's ailing banking sector sparks call for privatisation

The quality of bank boards should be prioritised.

The International Monetary Fund is the latest to back proposals pushing for the privatisation of India’s sickly banking sector in order to strengthen the quality of corporate governance in weakened state lenders.

There are a total of 21 public sector banks (PSBs) in India, according to data from the Department of Financial Services. This list includes Punjab National Bank (PNB) which was at the center of a record $2b fraud.

PSBs have incurred a massive $3.81b loss owing to fraud in the financial year 2017-18, according to a Right to Information reply, with PNB accounting for the lion's share of losses after diamond merchants took off with $2b in fraudulent loans. 

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The government is also reportedly resuming discussions on public sector bank consolidation with larger players like Bank of Baroda, Canara Bank and Union Bank of India eyed as absorbing smaller players like IDBI Bank and Dena Bank.

Public sector lenders are not exempt from the fate that doomed PNB as the country's PSUs have incurred an accumulated $3.81b (Rs25,775 crore) loss in the financial year 2017-18 due to a slew of banking frauds crippling the financial sector, according to a Right to Information reply. 

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Much-needed reforms that will strengthen the quality of governance in PSBs is needed to enhance banking efficiency and foster disciplined lending practices in India, IMF added.

“A first step would be to strengthen the quality and independence of these banks’ boards, and privatisation could also eventually be considered,” it said in a statement.

Outgoing Chief Economic Adviser (CEA) Arvind Subramanian argued in an earlier interview that India needs to trim its bloated banking sector to just three to five PSBs. "I think there should be more private sector banks and probably fewer banks. A healthy system is where we have three to five public sector banks, three to four private sector banks and one or two foreign banks," he said in an interview to local media.