RBI issues clarification on privatization of PSOs and declares “a phased approach to achieve better results”

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Clarifying a recent bulletin article on the privatization of public sector banks (PSBs), the Reserve Bank of India (RBI) said on Friday that the article was written by researchers at RBI and they are of the opinion that ‘instead of a big bang approach, a gradual approach as announced by the government would yield better results.

“As made clear in the article itself, the opinions expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India,” the RBI said, adding that “it relates to reports in certain sections of the media”. stating that the RBI is against the privatization of Public Sector Banks (PSB). These outlets quoted an article titled “Privatization of Public Sector Banks: Another Perspective” published in the August 2022 issue of the RBI Bulletin. The article is written by RBI researchers”.
He specified that:

i) As clearly stated in the article itself, the opinions expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India.

ii) The press release relating to the August 2022 Bulletin stresses that “the gradual approach to privatization adopted by the government can ensure that a vacuum is not created in the achievement of the social objective of financial inclusion” .

iii) The concluding paragraph of the article, inter alia, mentions that:

– “From the conventional view that privatization is a panacea for all ills, economic thought has come a long way in recognizing that a more nuanced approach is needed while pursuing it”;

– “The recent mega merger of PSOs has resulted in the consolidation of the sector, creating stronger, more robust and more competitive banks”;

– “A big bang approach to the privatization of these banks could do more harm than good. The government has already announced its intention to privatize two banks. Such a phased approach would ensure that large-scale privatization does not create a vacuum in achieving important social goals of financial inclusion and monetary transmission.

Thus, the researchers are of the opinion that instead of a big bang approach, a gradual approach as announced by the government would give better results.

The RBI paper, released on Thursday, said: “A big bang approach to privatizing these banks (PSB) could do more harm than good. The government has already announced its intention to privatize two banks. Such a phased approach would ensure that large-scale privatization does not create a vacuum in achieving important social goals of financial inclusion and monetary transmission.

He also said that the recent mega-merger of PSBs has led to industry consolidation, creating stronger, more robust and more competitive banks. The creation of the National Asset Reconstruction Company Limited (NARCL) will help remove the legacy burden of bad debts from their balance sheets.

The recently formed National Bank for Infrastructure and Development Finance (NABFiD) will provide an alternative channel for infrastructure financing, thereby reducing the asset-liability mismatch problems of PSOs. Overall, these reforms should help to further strengthen PSOs.

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