Dilute Banking Stakes Below 50%: Nobel Laureate Abhijit Banerjee’s solution Advice to Indian Banking Sector

Describing the current crisis in the country as frightening, nobel laureate Abhijit Banerjee did not mince words when he called for aggressive policy changes to grapple with the situation.

Not content with offering homilies, he advised that the government should reduce its stake in public sector banks to below 50 per cent, so that they are out of the ambit of the Central Vigilance Commission.

The reasoning is that the fear of investigation by the CVC in default cases acts as a dampener in decision making; this has paralysed the banking system and bankers do not want to lend. "Reducing government equity in public sector banks to under 51 per cent will take them out of the CVC purview," Abhijit Banerjee explained.

"The current banking crisis is frightening and we should worry about it a lot, because we see a recurring pattern...We should be vigilant about this. I think we need important and aggressive changes," he said at interaction with the media.

Prodded further, Banerjee said the "fear" of their decisions being investigated by the CVC leads to hiding of defaults, which then creates problems. ‘‘I want the government to have less equity in banks, so that the fear psychosis in banking sector is eliminated," he said.

The banking system has been afflicted by the scourge of high NPAs (non-performing assets) for nearly five years now, which has led to net-worth erosion.

Nobel laureate Abhijit Banerjee, who met PM Modi here on Tuesday, said the latter joked about the media trying to entice him into making "anti-Modi" remarks. Extremely wary in a media interaction after the meeting at the prime minister's official residence, Banerjee refused to take questions on the state of economy and refrained from commenting on policies of the government. "I had a cordial and good meeting. Prime Minister Modi started by cracking a joke about how media is trying to trap me into making anti-Modi utterances. He's been watching TV and he's been watching you guys. And he knows what you are trying to do," he told the reporters.