Raghuram Rajan calls for eliminating differences between public and private sector banks

MUMBAI: Outgoing Reserve Bank of India Governor Raghuram Rajan today called for eliminating regulatory differences between public and private sector banks to improve their governance.

“Authorities like the central bank and the Government should, over the medium term, reduce the differences in regulatory treatment between public sector banks and private sector banks, and more generally, between banks and other financial institutions,” Rajan said.

Rajan explained that these differences could be mitigated if the government paid adequate price for mandates when for example: if each direct benefit transfer was paid a remunerative price, all banks would have an incentive to undertake the business and open basic customer accounts.

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Rajan also explained in detail about the “authorities dilemma” and said that they should ensure that their actions were institution, ownership, and technology neutral so as to ensure that the most efficient customer-oriented solutions emerge through competition.

Rajan said that banks in India were subject to the grand bargain whereby even when they got benefits of raising low-cost insured deposits they were subject to quite a lot of government mandates such as opening PMJDY accounts, or making MUDRA loans.

“While it is unclear whether the cost of the mandates outweigh the benefits, they do skew the competitive landscape,” Rajan said.