Following the Rs 11,300 crore Punjab National Bank fraud by accused diamond trader Nirav Modi, Finance Minister Arun Jaitley on Saturday ruled out privatisation of public sector banks (PSBs), saying the move may not find political consensus.
In light of the PNB scam that has rocked the Indian banking system since February 14, the industry chambers Ficci, Assocham and CII have urged the government to surrender its majority control of banks and allow them to function like private sector lenders.
"This (privatisation) involves a large political consensus. Also, that involves an amendment to the law (Banking Regulation Act), as well as amendment in the political consensus," Jaitley said at the ET Global Business Summit here.
"My impression is that Indian political opinion may not find favour with this idea itself. It's a very challenging decision," he said.
Industry chamber Assocham said last week that the PNB scam should act as a "strong trigger" for the government to surrender its majority control of banks which should then be allowed to work on the lines of private sector lenders with a full sense of accountability to their shareholders and protecting interest of depositors.
Noting that recapitalisation of state-run banks over the last decade has had little impact on improving their health, the Federation of Indian Chambers of Commerce and Industry (Ficci) called for their privatisation in the interest of creating "a dynamic banking sector" in the country.
Jaitley said the question of "moral hazard" comes up in using taxpayers money to recapitalise banks that are hugely stressed on account of their accumulated non-performing assets (NPAs), or bad loans.
The accumulated NPAs in the Indian banking system have crossed a staggering Rs eight lakh crore, with PSBs themselves accounting for over Rs seven lakh crore of bad loans.
In the face of this, the cabinet, in October 2017, approved a recapitalisation plan for PSBs worth Rs 2.11 lakh crore.
On Friday, Ficci President Rashesh Shah told reporters he had met the Union Finance Minister with a request to begin the process of bank privatisation in a phased manner, leaving just a handful of lenders in the public sector.
The Chief Economic Advisor (CEA) Arvind Subramanian has also advocated more private participation in public sector banks.